US Dollar: Fed pricing stays hawkish – BBH

Brown Brothers Harriman’s (BBH) Elias Haddad notes that the rebound in Oil is lifting US inflation expectations and supporting the Dollar. Haddad highlights sticky US inflation, a resilient labor market and US economic outperformance as factors keeping Fed pricing hawkish. He sees scope for further Dollar gains over the next couple of months as rate differentials remain supportive.

USD supported by hawkish Fed outlook

"The rebound in crude oil prices is worsening the inflation outlook, pushing bond yields higher across the curve and weighing on major equity markets. USD pared back some of yesterday’s gains triggered by heightened geopolitical risks. We see scope for further USD gains in the next couple of months."

"Fed Governor Christopher Waller warned yesterday “If we get another hot reading on core inflation , then the FOMC will need to consider tightening monetary policy in the near term.” Fed funds futures price in 43% odds of a 25bps hike to a target range of 3.75-4.00% at the next July 29 FOMC decision and nearly 50bps of tightening by year-end."

"Today, the US June CPI data will help shape near-term Fed funds rate expectations (1:30pm London, 8:30am New York). Headline CPI is expected to fall -0.1% m/m vs. 0.5% in May on lower gasoline prices, to be up 3.8% y/y vs. 4.2% in May. Core CPI is seen rising 0.2% m/m and print at 2.8% y/y vs. 2.9% in May."

"Fed Chair Kevin Warsh’s testimony before the House Financial Services Committee will add another layer of volatility today (3:00pm London, 10:00am New York). Warsh is expected to reaffirm the Fed’s unwavering commitment to its 2% inflation target, supporting a higher for longer policy stance. Warsh may also be pressed on his five task forces and what it could mean for the future conduct of monetary policy."