The US dollar is drawing renewed fundamental support as soaring inflation and the Middle East energy crisis strengthen the case for another Federal Reserve rate hike, with almost three-quarters of futures-market bets pointing to a 25 basis point increase at the Fed's next meeting. US producer prices rose 0.4% in August, and the 10-year Treasury yield has surged to 5%, a sign the market is growing more concerned about stagflation. The main event of the day is the consumer price index, where a higher-than-expected reading would reinforce rate-hike bets at the Fed's September meeting while a softer reading could reverse them. The ECB made two moves, raising its deposit rate by 25 basis points to 2.5% and setting a forecasted growth rate of 0.9% for 2026, while projecting average inflation of 3% for 2022 and 2.5% for 2027. Sterling may be affected more by policy divergence, as the market largely expects the Bank of England to hold rates steady at its next meeting, with Governor Bailey having pushed back on speculation of further hikes and July GDP data expected to show the UK economy did not grow.
