The US Dollar (USD) has strengthened across major currency pairs as markets anticipate key monetary policy decisions from the US Federal Reserve (Fed) and the Bank of Japan (BoJ) later this week [1][2][5]. The USD/JPY pair has climbed near 155.00, with resistance at 155.20 expected to challenge further gains, while the US Dollar Index (DXY) trades around 99.65, up over 0.15% for the day and approaching a two-week high [1][5]. The DXY has been supported by rising US Treasury yields, with the 10-year yield hitting a fresh 19-year high of 5.03% [3][5][7].
Market participants are pricing a 92% probability that the Fed will hike interest rates by 25 basis points to 3.75%-4.00% on Wednesday, marking the first increase after five consecutive meetings of unchanged policy [1][3][7]. Analysts at Danske Bank and BNY expect this hike, with Danske Bank projecting additional 25bp hikes in December and March, potentially taking the Fed Funds rate to 4.25-4.50% by the end of 2027 [5][3]. However, BNY strategists caution that the path to significantly tighter policy faces potential impediments, and ING economists suggest the Fed may stop after this hike, despite market pricing for further increases [3][7].
The BoJ is also expected to raise rates by 25 basis points on Friday, with analysts noting a shift toward a more hawkish stance and normalization of policy [1]. Technical analysis shows USD/JPY remains below the key 155.20 resistance, with momentum indicators still in bearish territory, while the DXY faces a confluence hurdle at 99.80 [1][5].
Rising US yields and hawkish Fed expectations have pressured risk assets and non-yielding commodities such as silver, which trades near $63.14, below its 20-day EMA, with subdued momentum [7]. MUFG notes that while FX volatility has picked up, spillovers from higher yields have been modest so far, but high-beta and emerging market currencies face greater downside risks if yields and energy prices continue to rise [2].
In the Eurozone, the EUR/USD is trading near its short-term fair value, but ING warns that a risk-off reaction to a hawkish Fed could push the pair toward 1.150 [4]. The Euro has trimmed some losses, supported by expectations for improving German ZEW data and the impact of last week's ECB hike, but remains near two-week lows [4][6].
CONCLUSION
Markets are bracing for significant central bank actions, with the US Dollar and Treasury yields strengthening ahead of expected rate hikes by the Fed and BoJ. While the consensus points to a hawkish Fed move, analysts are divided on the likelihood of further tightening. The elevated yields and policy uncertainty are fueling volatility and downside risks for risk assets and non-yielding commodities.