Sticky inflation to keep dollar higher for longer, says ING

US inflation staying higher is pushing bets that the Federal Reserve will keep rates higher and for longer, ING said in a note. Markets have been battered with bond bearish/dollar bullish set of US data this month.

Now, traders are pricing in three more rate hikes from the Fed, allowing the dollar to hold on to gains.

“We have learned that US inflation is proving much stickier and US activity firmer than we were led to believe in December and January,” Chris Turner, Global Head of Markets and Regional Head of Research for UK & CEE at ING said.

“Understandably, investors are now taking the Federal Reserve hawks more seriously and have priced three more 25bp rate hikes from the Fed in March, May, and June,” he added.

The recent hawkish data also questions what the new set of Fed Dot Plots will look like when they are released on March 22, he added.

Currently, the Fed's median expectation sees Fed Funds at 5.00 percent-5.25 percent by the end of 2023 and 4.00 percent - 4.25 percent by end-2024.

Both these projections could be revised higher, the economist said.

“This prospect could well dissuade investors from re-entering dollar short positions over the next few weeks. At the same time, the US 2-10 year yield curve is now inverted the most since the Paul Volcker tightening of the mid-1980s - creating a headwind to risk assets. It is hard to see global equity markets pushing much further ahead until there are clearer signs that the Fed - and other central banks - can relent in their tightening cycles,” he added.

The dollar index broke above 105.00 last week and the multi-week bias looks towards resistance at the 106.20/106.50 area - some 1.00 percent/1.20 percent above current levels.

The dollar gains last year have battered emerging market currencies as the US central bank raised rates sharply in quick succession. The rupee had also fallen to record lows against the greenback but remained competitive compared with several of its emerging and developed market peers.

While the Fed is expected to hike rates, the European Central Bank also is very much in hawkish mode. The ECB is expected to raise rates by 50 bps in March and investors expect more rate hikes.

ING says that the Fed could be in a position to cut by year-end, while the ECB looks likely to keep rates at their peak throughout the majority of 2024.