Hawkish Fed pushes Dollar higher as signs of higher inflation in 1Q23 pile up

Signs of picking up US economic activity and inflation in the new year have fueled hawkish rhetoric from Fed officials. Yesterday it was the Fed's Mester and Bullard's turn to once again put forward the idea of a more aggressive 50 basis point rate hike. Barkin and Bowman are also speaking today, and most likely they will also try to set the markets for a longer tightening of monetary policy.The dollar continues to rise steadily, erasing the loss that has been observed since October last year. DXY trimmed down about a quarter of this sell-off. Strengthening was clearly caused by hawkish repricing of the Fed cycle, where the view of restrictive rates for a longer period now prevails. Yesterday it was the turn of Loretta Mester and James Bullard to reveal how they advocated a 50 basis point hike earlier this month instead of 25 basis points. In essence, their rhetoric implied that they are willing to vote for 50 bp at the upcoming meeting.Their comments were in line with the January US PPI report, above consensus, and boosted 10-year US Treasury yields by another 6-7 bps. The yield on US 10-year bonds at 3.89% is now the highest since November. Higher long-term bond rates also led to a significant repricing of the Fed's curve this month, which now prices in the terminal federal funds rate at 5.10% for December 2023. Literally a month ago the estimate was just 4.35%.Markets are heeding the Fed's hawks because US activity and price data are coming in stronger than expected. The improvement in economic activity data is partly due to the weather, and the effect of natural disinflationary factors seems to be shifting from the first to the second quarter. It will now be possible to expect some medium-term decline in the dollar only in the next quarter.Today we will also receive comments from Fed officials Thomas Barkin and Elizabeth Bowman, as well as an update on January import prices. DXY is likely to continue looking to test the round 105.00 level. The next major contribution to the strong dollar story will be the FOMC minutes due next Wednesday.A hawkish repricing of the Fed curve dominates the markets, and while eurozone money market rates have also risen, the two-year EUR/USD swap differential has widened to levels last seen in mid-December. Now it is -110 bp. narrowing from -150 b.p. at the beginning of this month.There isn't much news on the eurozone calendar today, other than December current account data, and the market seems to be ignoring yesterday's comments by ECB dove Fabio Panetta, who favors the ECB's 25bp move over 50bp.In contrast to the Fed's hawkish rhetoric yesterday, comments by Bank of England Chief Economist Hugh Pill indicated that the Bank of England is moving towards a slower pace of tightening. The market expects a 25 bp rate hike by the Bank of England. to 4.25% next month, which means that the pressure on the GBPUSD is likely to increase due to expectations of a less favorable rate differential for the GBP.