- The futures market is wrong to expect between 2 and 3 ECB rate hikes in 2026.
- Accelerating US inflation will lead the Federal Reserve to adopt a more aggressive stance.
The US dollar took two steps forward and one step back following another set of aggressive macroeconomic data and new all-time highs for US indices. China's rise in market capitalization to $5.5 trillion triggered a rally, boosting global risk appetite and reducing demand for the dollar as a safe-haven asset. The bears were unable to fully capitalize on the biggest PPI acceleration since 2022, up to 6% in April.
The Federal Reserve prefers to measure inflation using the Personal Consumption Expenditure (PCE) index. Based on CPI and PPI data, core PCE could accelerate to 3.3% in April. Coupled with the stabilization of the labor market, this gives CME derivatives a more than 30% chance of a rate increase in 2026, rising to 50% in March 2027.
Meanwhile, the ECB has signaled that it may not share the view of Bloomberg and futures market experts that there will be two or three rate increases of 0.25 percentage points this year. Executive Committee member Olli Rehn said the eurozone is on the brink of a stagflationary shock, while chief economist Philip Lane believes a contraction in domestic demand will make it difficult to tighten monetary policy.
The yen found its footing after three days of selling following a statement from the OECD that the Bank of Japan would raise its overnight rate to 2% by the end of 2027. It must continue its monetary tightening cycle to prevent the economy from overheating.
From a bond yield spread perspective, it looks overbought. This allows the government to argue that the pair has become decoupled from economic fundamentals. However, speculators are betting on high interest rates, carry trades and strong demand for the US dollar as a safe haven asset.
The pound continued to fall amid comments from central bank officials. Sarah Breeden believes that the Bank of England cannot wait forever, but that there is no need to tighten monetary policy in either June or July. Traders were previously buying on expectations of three rate hikes in 2026, but rising political risks and dovish rhetoric from the Bank of England are forcing them to dump sterling.
He FxPro Analyst team
