Dollar Up; Interest Rate Expectations Rise

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Dollar Up; Interest Rate Expectations Rise

OCTOBER 18, 2021

The U.S. dollar is modestly stronger across the board this morning as global risk appetite has softened. 

Overview

A continuing rally in energy prices and other commodities has led to higher inflation across the globe.  As such, traders are beginning to price in more aggressive interest rate hikes ranging from the U.S. Federal Reserve to the Bank of England.

U.S. September industrial and manufacturing production will cross the wire at 9:15 and represents the sole piece of tier one data.  Recent U.S. data has been mixed. Retail sales showed an impressive advance, but consumer sentiment plummeted amidst rising inflation pressures.

The Fed’s Neel Kashkari and Randal Quarles are slated to speak later today as bets increase the Fed will find the scope to begin raising rates next year.  Swaps show market fulling pricing in two full 25 basis point hikes by the end of next year compared to just one hike two weeks ago.

What to Watch Today…

  • Industrial production at 9:15 a.m. 

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NZD  

The NZD/USD currency pair was the most volatile overnight.  The kiwi initially rallied over half a percent overnight as the consumer price index shot to the highest level since 2011.  The year-over-year number was 4.9%, higher than the anticipated 4.2% and well above the Reserve Bank of New Zealand’s 1-3% target.

The Kiwi’s gains were short-lived, however.  The kiwi gave back all off of its gains and is a touch lower versus the greenback after the New Zealand government announced that Auckland, the nation’s capital, would remain in a level three lockdown for at least two more weeks.

GBP   

The British pound is slightly weaker to start the week even as rate expectations continue to creep higher.  Over the weekend, Bank of England Governor Andrew Baily said the BOE will “have to act” to curb inflationary forces.  He maintains that he believes the spike in inflation will be temporary.

Swaps show traders are betting the Bank of England will raise rates by 0.5% by the end of this calendar year, far outpacing its American counterpart.  For example, markets see the Bank of England raising rates to 1.25% by the end of next year, and only 0.5% in the U.S.

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