Fed rate hike bets and US bond rout bolster the dollar, hurt equities and gold

Middle East uncertainty keeps yields and Fed hike bets elevated

The US dollar continued outperforming all its major peers on Monday and during the Asian session Tuesday, driven by rallying Treasury yields amid elevated expectations that the Fed may proceed with multiple additional rate hikes in the months to come.

With the US and Iran talks on the sidelines of last week’s UN General Assembly hitting a dead end, and US President Trump rejecting during the weekend an Iranian proposal to reopen the Strait of Hormuz, investors remained concerned about the upside risks to inflation and thereby maintained a steep implied Fed rate path.

According to Fed funds futures, there is a 73% probability of a back-to-back rate hike in October, while another one is fully priced in by January. Excluding the rate hike delivered on September 16, investors anticipate around 95bps worth of additional increases by the end of 2027.

There was some positive news later on Monday that Trump was ready to ease sanctions should progress was made on the nuclear front, and that Qatari mediators will try to bring the two nations closer to finding common ground. Nonetheless, although this resulted in a pullback in oil prices, the US dollar remained strong, perhaps as several key US data are on the agenda for the remainder of the week.

Dollar traders to lock gaze on upcoming key data

Tomorrow, alongside the final estimate of the Q2 GDP, the PCE indices for August will be released and the more-important ADP employment report for September, which could provide an early indication about how the labor market fared during the month ahead of Friday’s official nonfarm payrolls. The ISM manufacturing PMI for September, due out on Thursday, will also be closely monitored.

A set of strong data could solidify the notion that two more rate hikes may be delivered by the Fed before the turn of the year, thereby keeping Treasury yields and the US dollar in a climbing mode.

RBA hikes rates as expected, yen faces strong intervention warnings

The Reserve Bank of Australia raised its cash rate today for the fourth time this year, taking it to its highest level in 15 years. The decision was unanimous and in line with market consensus.

As with other major central banks that raised rates recently, the RBA cited persistently elevated inflation and growing upside risks amid the conflict in the Middle East. Although policymakers acknowledged that previous increases have tightened financial conditions, they remained prepared to raise rates further if inflation does not cool down.

 With investors now largely pricing in a fifth rate hike by February, the immediate focus for aussie traders shifts to Australia’s inflation figures for September, due out tomorrow.

The yen seems to have stabilized following Friday’s strong rebound, triggered by remarks from Japanese finance minister Katayama. Katayama disclosed that US President Trump had expressed concerns about the yen’s weakness during his meeting with Prime Minister Takaichi, while later in the day she held a call with US Treasury Secretary Bessent, where they agreed to strengthen cooperation on the yen.

On top of that, there were reports that Japanese authorities conducted fresh rate checks on Friday, while today, Katayama hit the wires again, saying that the yen’s undervaluation is generally a problem and that they will maintain orderly FX markets. More importantly, Japan’s top FX official, Atsushi Mimura said on Monday that markets should take the warnings at face value.

With all that in mind, it seems that Japanese and US officials are willing to intervene at lower levels than they did last time. Back in July, they took action slightly below 164.00 in dollar/yen, while now, they appear ready to pull the trigger even below 160.00.

Wall Street slides, gold tumbles amid rallying yields and strong dollar

On Wall Street, all three of its main indices closed Monday in the red, with Nasdaq losing the most ground even as Nvidia rose amid headlines that the tech titan boosted its authorization of share buybacks by a record of $150 billion.

It seems that the elevated Fed hike bets and the uncertainty surrounding the Middle East are more important for equity investors for now. Even if the futures market is pointing to recovery today, the move is likely to be limited, reflecting caution ahead of the upcoming key US data that could well bolster speculation about higher borrowing costs.

Gold was the biggest casualty of elevated Fed hike bets and the US-Iran stalemate yesterday, as a combination of rallying yields to fresh multi-year highs and a strong dollar pushed the precious metal down nearly 4%. From a technical standpoint, the bears broke several key support zones to take a breather near the key territory of $4,115. Although they allowed a small rebound today, it may be just a matter of time before that zone is also breached if this week’s data support the notion of several more Fed hikes. The next target may be the psychological round figure of $4,000.