However, the caveat this time around is that we have already seen the dollar already gain significantly on rate hike bets. And one can argue that with the recent drop in Treasury yields, we have perhaps priced in maximum hawkishness by the Fed already - at least for the time being.
That is also evident as markets see a lower and sooner terminal rate as compared to a week ago.
As rate hike bets cool, that seems to be the case with the dollar this week as well. There is also an argument that we are overdue a technical retracement in the greenback and that is a fair one. But it is no coincidence that it comes alongside receding bets on further hawkishness by the Fed.
Considering that inflation pressures are still running rampant and supply chain issues are still persistent, there is widespread fears of recession (and stagflation) risks brewing across the globe. The US will not be exempt to that and economic data in the coming months, more so later in Q3 perhaps, will be telling as to whether they will go down that path.
If that is the case, it hints that the Fed's window to tighten may be becoming narrower. And you only need to take a look at how the market perceives the BOE at this stage to get a sense of what the reaction may be.
Broader recession fears could trigger a wave of risk aversion across equities and that usually tends to see safety flows into the dollar and bonds. However, if that coincides with the market taking off bets on Fed rate hikes, that could see the dollar be met with outflows as well.
I mean Fed fund rate futures already see roughly 88% odds of the Fed hiking to above 2.50% by year-end. If there is any pullback on that, the typical dollar bet on recession risks isn't going to be as straightforward as it looks.
