The dollar edged up against major peers today, as markets priced in around a 1-in-4 chance of the U.S. Federal Reserve raising benchmark rates this month after robust jobs data on Friday.
The dollar index - which tracks the greenback against six peers - came off the boil last week, after some Fed officials voiced a preference for a pause in rate hikes and after a breakthrough in U.S. debt ceiling talks calmed market jitters.
Despite a surprisingly high payroll figure for May, indicating the U.S. economy may still be running hot, analysts said the Fed may still have scope to pause rate rises as wage pressures eased and unemployment rose from a 53-year low.
Markets now put the probability of a 25-basis point hike at the meeting on June 13-14 at 27%, down from 2-in-3 odds a week earlier.
Office for National Statistics data suggested late last month that homegrown inflation pressures strengthened further in the UK during April when they had been widely expected to moderate, leading to an aggressive upward revision to market expectations for the BoE Bank Rate.
The uplift has seen the expected peak for Bank Rate rise from just less than 4.75% to almost 5.5% and has entirely offset the Dollar's earlier yield advantage over Sterling in the process, although some say market expectations have moved too far and left the Pound-Dollar rate vulnerable.
Market pricing for the path of the Funds rate over the next year is appropriate in our view. But we consider market pricing for rate hikes by the European Central Bank and the Bank of England has gone too far.
Financial markets are currently pricing around 90bp of further tightening from the BoE while in our view only 50bp of further hikes will be delivered. However, there is no important UK economic data in the week ahead so market pricing may not change too much this week.