Mountain of risks has dollar poised for best week since February

• Dollar index rises to best levels since April 10th (euro falls to one-month low)
• Rising inflation expectations keeps future Fed rate hike risks in play
• Consumer sentiment tumbled 9% as recession worries persist

US stocks are softer as banking jitters persist and after a steady dose of reminders of all the risks that remain on the table; Treasury Secretary Yellen reiterated that a default would be “an economic and financial catastrophe.”, while Fed’s Bowman warned that they will likely need to raise interest rates further and hold them higher for some time if inflation remains high.

Today’s US economic data also reminded investors that stagflation risks aren’t going away anytime soon. ​ The University of Michigan sentiment survey showed that long-term inflation expectations jumped to a 12-year high at 3.2%. In addition to deteriorating sentiment and current conditions, expectations plunged to the lowest levels since July. ​ The consumer is becoming rather grim and if inflation expectations continue to remain elevated, that could force the Fed to tighten more.

Given all the resilience from the US economy that we’ve seen so far, it is hard to argue that we are seeing enough weakness in the service sector to justify any chance that inflation will fall to 3.0% anytime soon. ​ Unless the credit crunch gets much worse or the Fed ends up having to deliver more rate hikes, we might see the disinflation process struggle over the next few months.​

FX

There are a lot of short-term risks for the economy and that has helped the dollar have its best week in a couple of months. If Europe could get done with their last couple rate hikes, the dollar might need to dust off that crown again. King dollar isn’t back, but sustained weakness seems unlikely now. ​ ​ ​ ​ ​ ​

Fed

Fed’s Bowman reminded Wall Street that the Fed is data-dependent and that the next move could still be a rate hike. ​ Bowman said, “Should inflation remain high and the labor market remain tight, additional monetary policy tightening will likely be appropriate to attain a sufficiently restrictive stance of monetary policy to lower inflation over time.” ​

Bowman, a centrist, might not really believe that a rate hike is needed just yet, but her comments are justified in pushing against all the rate cuts that are getting priced. ​

Content is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Business Information & Services, Inc. or any of its affiliates, subsidiaries, officers or directors. If you would like to reproduce or redistribute any of the content found on MarketPulse, an award winning forex, commodities and global indices analysis and news site service produced by OANDA Business Information & Services, Inc., please access the RSS feed or contact us at info@marketpulse.com. Visit https://www.marketpulse.com/ to find out more about the beat of the global markets. © 2023 OANDA Business Information & Services Inc.