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[MARKET ANALYSIS] DXY firms on hawkish Fed Minutes, NZD continues to gain amid hawkish Breman

The DXY's rise is primarily driven by hawkish FOMC Minutes indicating a potential for rate hikes due to elevated inflation risks from rising oil prices.

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[MARKET ANALYSIS] DXY firms on hawkish Fed Minutes, NZD continues to gain amid hawkish Breman

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  • FX Markets are paring some of Wednesday's optimism with crude up around 3.5% and general risk-off elsewhere as markets weigh Iran's claims of ceasefire breaches and subsequent concerns over Hormuz following reports from state media.
  • DXY cautiously chugged higher throughout the European morning, with the index up 0.1%, supported by the key 99.00 mark. Overnight, FOMC Minutes were viewed as hawkish, with it stating many members said persistently higher oil prices could keep inflation elevated long enough to justify rate rises. Taking a look at rate expectations, markets moved to price just 7bps of easing by year-end compared to 15bps pre-minutes.
  • Aside from monitoring Hormuz traffic, the buck will likely focus on further geopolitical developments amid the lack of tier 1 data given the collection window falls mostly pre-war. One specific development to watch this session is the matter of Lebanon, with both the US and Iran in disagreement re. its inclusion in the ceasefire, ahead of talks in Islamabad.
  • Kiwi continues to perform well, amid hawkish remarks from RBNZ Governor Breman, she said inflation is expected to increase considerably in the near-term, and they will ‘act decisively’ if core prices pick up. This marks the second day of gains against the greenback, with NZD the sole currency that outperforms a mildly stronger USD. In terms of market pricing, 75bps of easing is expected by year-end, an increase of 15bps since last week.
  • JPY is the worst performer in the G10 space with USD/JPY +0.3% as energy prices weigh on the net importer nation. The pair marked a session low of 158.45 and sits on a 159 handle at the time of writing. Elsewhere, EUR/GBP trades a touch above the 0.87 mark. In a note this morning, ING suggests rate differentials will help the cross with EUR; rate expectations are likely to prove sticky and BoE dovish pricing potentially coming "through more smoothly" should energy prices continue to decline.
Context

As markets adjust expectations, the USD strengthens against the JPY and continues to face mixed reactions with the NZD, which is buoyed by hawkish comments from RBNZ Governor Breman, reinforcing the divergence in monetary policy outlooks between the U.S. and New Zealand.

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