The market is pricing in a higher path for the Fed funds rate ahead of tomorrow’s speech from Fed Chairman Jerome Powell and that means a higher US dollar.
The implied peak is now up to 5.11%, which essentially matched the Fed dot plot of 5.00-5.25% and rates remain at 4.75% through year end.
This comes on a rethink following extraordinarily strong data on Friday on US non-farm payrolls and the ISM services survey. It points to an economy that will be more resilient than believed at the turn of the year. Some indicators (housing is one) are even pointing to a re-acceleration in activity.
That’s something the Fed may be keen to lean against. It would mean that US rates will have to move higher than other central banks, creating a wider spread. A hawkish shift from the Fed could ultimately curb global growth as well and that’s weighing on commodity currencies today.
AUD/USD is now down 60 pips on the day and trading at a session low of 0.6859.
It’s been a sharp three-day reversal following a seven-month high close immediately after the FOMC on Wednesday.