ING’s Chris Turner notes the US Dollar (USD) is supported as higher energy prices fuel expectations of further central bank tightening, with markets pricing more hikes from the European Central Bank (ECB) and Bank of England (BoE). While ING does not expect the Federal Reserve (Fed) to hike next week, Turner warns it is dangerous to fight the trend and sees US Dollar Index (DXY) potentially breaking above June’s 101.80 high.

Fed credibility and energy-driven support

"The dollar continues to perform well as high energy prices raise expectations for a central bank response."

"President of the ECB, Christine Lagarde, made it pretty clear yesterday that the central bank would be hiking in September, and markets now price a further 75bp of tightening for both the ECB and the Bank of England. That seems excessive, but is hard to fight unless energy prices turn sharply lower soon."

"Crucially – and after the June FOMC meeting – the market believes the Federal Reserve will have to respond as well. Since that June FOMC meeting, two-year real USD swap rates have risen 30bp as investors buy into the only message we have heard from the Fed – the need to restore credibility when it comes to fighting inflation."

"US data today is relatively light – just July S&P PMI readings and new home sales. But with US President Donald Trump threatening a fresh military onslaught on Iran, expect investors to hold onto their long dollar balances into the weekend. DXY is not far from June's 101.80 high and an upside break-out cannot be ruled out."

"While we do not think the Fed will hike next week, it remains very dangerous to fight this trend and, as we have been saying all week, we expect the dollar to outperform."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)