Dollar rose in European trade on Monday against a basket of major rivals, maintaining gains for second day as US treasury yields spiked for new highs. 

Bets are still high the Federal Reserve will raise interest rates by 25 basis points by the end of the year following a batch of bullish data.

The Index

The dollar index rose 0.2% to 105.76 with a session-low at 105.52, after rising 0.2% on Friday, the third profit in four days, marking a six-month high at 105.78. 

The index rose 0.9% last week, the tenth weekly profit in a row, marking the longest weekly profit steak since July 2014. 

US Yields 

US 10-year treasury yields rose 1.6% on Monday, hitting 16-year high at 4.511% and bolstering investments in the dollar.

The gains came after the Federal Reserve hinted strongly at another interest rate hike this year. 

Such a decision came as the Fed prefers to gauge the impact of recent decisions on US data, opening the door for another 0.25% hike before the year end to combat inflation.

Following the hike, the Fed is expected to start cutting interest rates in 2024, but by a slower pace than previous expected.

Fed Chair Jerome Powell asserted that controlling inflation is expected to be a long-term process, which requires high interest rates for an extended duration.

Fed Remarks 

Several Fed officials hinted last Friday at several more interest rate hikes, and said the battle with inflation isn't over yet.

US Rates

Current pricing for a 0.25% interest rate hike in November stands at 25%, which is still rather low.

However, pricing for a 0.25% Fed interest rate hike stands at a higher 41%.

Sterling fell in European trade against a basket of major rivals, sharpening losses against dollar for the fourth straight day and plumbing a six-month trough as Bank of England paused interest rate hikes last week.

As both the Fed and BOE paused interest rate hikes last week, the rate gap between both US and UK remained at 25 basis points, and could likely expand in favor of the US if the Fed raised interest rates once more this year. 

GBP/USD

GBP/USD fell 0.2% to 1.2213, the lowest since March, with a session-high at 1.2257, after losing 0.5% on Friday, the third loss in a row as investors buy up the greenback.

The pound lost 1.2% against US dollar last week, the third weekly loss in a row following Bank of England and the Federal Reserve policy meetings.

BOE

Bank of England voted to hold interest rates unchanged at 5.25%, the highest since March 2008, confounding expectations of a 0.25% hike to 5.5%.

Such a pause is the first for Bank of England since it launched the current cycle of interest rate hikes in December 2021, in turn hurting the pound's standing.

The BOE stated it'll continue to monitor inflation indices and economic data, adding that the policies have become tight enough to bring inflation to the 2% target.

The BOE's press release pointed to the slowing down consumer prices and labor conditions, and weaker business sentiment as basis for the decision.

BOE Governor Andrew Bailey asserted the bank will continue to monitor data to judge the need for another interest rate hike.

However he noted how inflation tapered off in recent months, which is a trend expected to carry on.

UK Rates

After the meeting, chances of a 0.25% interest rate by Bank of England in November tumbled to 64% from 81%.

Chances of an interest rate cut in September, 2024 rose from 27% to 55%.

Interest Rate Gap

The current interest rate gap between the US and UK stands at 25 basis points, the lowest since March 2022, but is likely to rise to 50 basis points by the end of the year amid strong prospects of another US interest rate hike. 

Euro rose in European trade on Monday against the pound, extending gains for the fourth straight session and scaling a four-month high as the UK-European interest rate gap diminished following recent meetings by Bank of England and the ECB.

Analysts now expect BOE to cut interest rates earlier than the European Central Bank in 2024 to boost the economy. 

EUR/USD rose 0.15% to 0.8702, the highest since May, with a session-low at 0.8680, after rising 0.3% on Friday, the third profit in a row as Bank of England paused interest rate hikes. 

EUR/GBP rose 1% last week, the third weekly profit in a row, and the largest since June.

Such strong profits came following policy meetings by the ECB and BOE, with the ECB raising European rates by 25 basis points while the BOE held British rates unchanged. 

Interest Rate Gap 

Following the meetings, the rate gap between the euro zone and Britain stands at 75 basis points, the lowest since March 2022.

Such a gap is expected to continue unchanged this year as both central banks likely have reached neutral levels.

As for next year, the gap might shrink in favor of the ECB, as Bank of England is expected to cut interest rates early in 2024. 

The UK economy is heading for recession faster than Europe, which necessitates a faster response by policymakers. 

Gold prices fell in European trade on Monday, resuming losses and moving in a negative zone under pressure from the stronger dollar against major rivals.

The decline coincides with the weaker demand on gold futures after the SPDR Gold-backed trust fund, the largest in the world, said its gold holdings tumbled to January 2020 lows on Friday.

Gold Prices Today

Gold prices fell over 0.2% to $1,920 an ounce, with a session-high at $1,927, after rising 0.3% on Friday, the first profit in four days on hopes that major global central banks have reached neutral interest rates. 

The Dollar

The dollar index rose 0.2% on Monday, maintaining gains for the second session and almost hitting six-month high at 105.78 against a basket of major rivals. 

Investors continue to purchase the greenback as the Fed paused policy tightening last week while US treasury yields surged. 

Several Fed officials hinted last Friday at several more interest rate hikes, and said the battle with inflation isn't over yet.

US Rates

Current pricing for a 0.25% interest rate hike in November stands at 25%, which is still rather low. 

However, pricing for a 0.25% Fed interest rate hike stands at a higher 41%. 

The SPDR

Gold holdings at the SPDR Gold Trust fund fell 1.44 tonnes on Friday to a total of 877.39 tonnes, the lowest since January 2020.