Dollar hits 19-year high.

There was a big shift in Federal Reserve rate expectations on Monday as aftershocks continued following Friday’s inflation data and a 40-year high for the headline rate at 8.6%.

Ahead of Wednesday’s Federal Reserve policy decision, there was a big move on futures with markets indicating that the chances of a 75 basis-point hike in the Fed Funds rate to 1.75% had increased to over 95% from 30% earlier in the day.

There was further selling n US Treasuries, especially at the longer end with the 10-year yield moving to above 3.35% and the highest level for over 10 years. There was a net flattening of the yield curve.

Wall Street equities again came under heavy selling pressure during the day with sharp losses for major indices.

Fears over more aggressive Fed tightening undermined support and unease over the risk of recession also sapped support amid a flatter yield curve.

The S&P 500 index declined 3.9% on the day, losing all of 2021 gains and entering bear-market territory. Futures looked to correct higher on Tuesday.

Higher yields and the shift in Fed expectations boosted the dollar while there was also a significant element of defensive demand as risk appetite deteriorated.

The dollar index posted a marginal new 19-year high just above the 105.00 level before a slight correction on Tuesday.

The UK unemployment rate increased to 3.8% in the three months to April from 3.7% previously, but there was a larger than expected employment increase.

Headline average earnings growth slowed to 6.8% from 7.0% and below expectations of 7.5% while the underlying wages increase held at 4.2% and above expectations of 4.0%.

The dollar gained further support from higher bond yields during the day. Speculation over more aggressive Fed tightening also underpinned the dollar. Risk aversion tended to undermine the Euro with reservations over the Euro-Zone outlook.

EUR/USD dipped to lows just below 1.0400 before a slight recovery.

The yen gained net support from risk aversion. Higher yields, however, also underpinned the US currency with USD/JPY support around 133.50 and a recovery to 134.70 on Tuesday.

Higher global bond yields limited support for the Swiss franc. USD/CHF posted net gains to above 0.9950 with resistance close to 1.000. EUR/CHF traded just below the 1.0400 level.

Sterling was undermined by weak fundamentals after the GDP data and fears over a trade war with the EU.  Risk aversion was also important in undermining the UK currency. GBP/USD dipped to fresh 2-year lows near 1.2100 before a recovery to 1.2175. GBP/EUR posted net losses to around 1.1650.

Commodity currencies came under sustained and heavy pressure amid a stronger US dollar and weaker risk appetite. Australian NAB business confidence dipped for June. AUD/USD slumped to 3-week lows near 0.6910 after sliding through 0.7000 before a correction to near 0.6960. USD/CAD posted further gains to a 3-week peak at 1.2900 before a marginal correction.

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