US dollar advance can extend further
At a Glance
The desk argues that the recent strength of the US dollar is likely to continue, supported by rising Fed rate hike expectations driven by robust CPI data. Per the full note , Derek Halpenny notes that this momentum has propelled the dollar beyond the critical 1.03 level, indicating market sentiment is aligning with the Fed's projected trajectory of interest rates. Given that a December rate hike is almost universally expected, further catalysts could bolster this bullish stance. However, upcoming payroll data will be pivotal in solidifying the Fed's position before the FOMC meeting.
Key Takeaways
- 01US dollar gains momentum on rate hike expectations
- 02CPI data supports a 50 basis point hike
- 03Upcoming payroll data will be critical for further moves
- 04Divergent outlooks among firms highlight uncertainty
Full Analysis
What the desk is arguing
The desk is confident that the US dollar's upward trend is set to persist in light of rising Fed rate hike expectations following a strong CPI print. As per the conversation with MUFG's Derek Halpenny, this environment justifies the dollar's advance above 1.03, marking its highest point since April. This affirmative shift is clearly rooted in anticipatory market pricing around the Federal Reserve's next moves, particularly leading up to the December meeting.
Analysts have begun to factor in a potential 50 basis point hike based on the latest CPI data, heightening the dollar's appeal against major currencies. Earlier consensus already posited a hike for December, thus confirming the market's belief that the Fed will maintain its hawkish stance. The upcoming payroll data will be crucial in determining if this bullish sentiment is further warranted.
Where it sits in our coverage
Current consensus targets vary across firms, with jpmorgan pegging the USD at 1.10 for March 2026 while bofa is considerably more cautious at 1.04. These contrasting views underscore the divergent strategies being adopted in light of dollar dynamics and Fed signals.
The positioning of our desk sits towards the higher end of this range, indicating a stronger bullish outlook on the dollar compared to bofa, which suggests a more conservative approach. As such, we are currently anticipating that the dollar could challenge these upside targets in the coming weeks.
How other firms see it
A multitude of firms such as jpmorgan are aligned with this bullish outlook, forecasting further dollar strength while bofa stands in contrast, providing a more bearish perspective among the larger groups of analysts.
This dollar strength correlates well with Federal Reserve narratives that shape overall market expectations, particularly against currency pairs like EUR/USD and USD/JPY, which are sensitive to changes in US monetary policy. Market participants should keep a close eye on these pairs for any spillover effects.
Market Implications
Traders should monitor the 1.05 to 1.10 levels in the USD index as critical thresholds, particularly with payroll data on the horizon that could adjust market expectations leading into the December FOMC meeting.
From the original
Derek Halpenny, Head of Research Global Markets EMEA sits down with James Roulston in FI FX Sales to discuss the further break higher for the US dollar on Fed rate hike expectations following the strong CPI data. Is the move justified? Derek also explains some of the details of y