Traders are increasingly betting on a US interest rate hike as swaps tied to policy-meeting dates now imply 25 basis points of hikes, up from 23 basis points on Thursday and eight basis points earlier in the week. This shift occurred during thin trading volumes with US markets closed for a public holiday.
The market's anticipation of tighter monetary policy follows new Federal Reserve Chair Kevin Warsh's firm stance against high inflation at his inaugural meeting this week, which sent yields higher on Wednesday.
Oil prices have also seen a rise, climbing around 4% from a three-month low on Thursday, as uncertainties persist regarding the recently signed peace deal between the US and Iran.
“We're now at a point where it wouldn't take much to tip the balance in favor of a hike.”
Matthew Ryan, head of market strategy at Ebury
Investors were caught off guard by Warsh's hawkish tone, as US President Donald Trump appointed him to the central bank post after criticizing his predecessor, Jerome Powell, for not reducing borrowing costs sufficiently.
Meanwhile, Brent crude steadied after surpassing $80 a barrel earlier in the session, with reports of a ceasefire agreement between Israel and Hezbollah set to begin on Friday.
Background
The financial markets are closely watching the Fed's policy direction, as Warsh's unexpected hawkish stance could signal a shift towards more aggressive rate hikes.
Investors should remain vigilant for further developments from the Federal Reserve, as any additional signals of rate increases could impact global financial markets.
