Markets were pricing in around 17 bps for Fed tightening for this month – until comments from Jefferson and Harker (both voters) supported the Fed ‘skipping’ a hike at the upcoming meeting, dumping pricing back to 8 bps; Jul pricing still reflects around 80% probability of a 25 bps hike. And this morning, ECB officials have downplayed signs of softer core inflation and persisted with messaging that rates will move higher still in the coming months. 

While short-term spreads have moved incrementally in support of recent USD gains (note elevated correlations with spreads for USD/JPY, EUR/USD and USD/CAD especially) the path to additional USD strength via yield differentials is likely to be choppy and perhaps somewhat limited.