Market Overview

At 16:59 ET (20:59 GMT) the U.S. dollar index was up 0.3% to 99.39, its highest level since September 2, reflecting a surge in expectations that the Federal Reserve will raise rates this week. The CME FedWatch tool placed the probability of a hike at 92.5%, up from 87.3% the previous day and 59.4% a week earlier, indicating a near‑95% market consensus for a rate increase.

Monetary‑Policy Context

The anticipated hike would be the first since July 2023. Recent U.S. consumer‑price and producer‑price data, together with a strong August non‑farm payroll report, have tilted the outlook toward a quarter‑point increase. Deutsche Bank analysts, led by Matthew Luzzetti, argued that “the case for a rate hike is strong,” citing solid growth, a rebounding labour market, and persistent PCE inflation. The bank added a third 25 bp hike to its outlook, projecting 75 bp of tightening in total, with 25 bp moves in September, December and the following March.

Bond Market Reaction

U.S. Treasury yields have risen sharply, with the benchmark 10‑year yield briefly hitting 5% on Monday – the first time it reached that level since October 2023 – contributing to higher borrowing costs across markets.

Commodity Influence

Crude‑oil benchmarks have jumped nearly 20% over the past two weeks, driven by renewed military strikes between the United States and Iran and an expanding conflict between Saudi Arabia and Iran‑backed Houthi forces in Yemen. The oil price surge has reinforced expectations of tighter monetary policy.

Currency Movements

  • The Japanese yen weakened, with USD/JPY at 154.29, up 0.5% after a recent rally tied to expectations of a Bank of Japan rate hike.
  • The British pound slipped 0.2% to $1.3494, awaiting the Bank of England’s decision.
  • The Canadian dollar eased, with USD/CAD at 1.3899, up 0.2%. Canada’s consumer‑price index rose 3.0% YoY in August, unchanged from July and in line with consensus, keeping inflation above the Bank of Canada’s 2% target. The BoC had earlier kept policy rates steady for a seventh consecutive meeting.

JPMorgan analysts Bennett Parrish and Michael Hanson noted that while the CPI report hinted at modest firming beneath the headline, it showed little evidence of a broad‑based acceleration in underlying inflation, which the BoC views as a risk from a prolonged energy shock.

Contributors

The article was contributed by Roushni Nair and Pranav Kashyap.