The US Dollar has been exhibiting formidable strength, outpacing other major currencies for the second consecutive day. This bullish momentum is fueled by hawkish commentary from Fed officials, notably Federal Reserve Governor Michelle Bowman. Her recent remarks about the potential for further rate hikes have heightened market anticipation, especially as she underscored persistent risks that could drive inflation higher:

Bowman's assertion became more palpable after Canada reported unexpectedly high inflation figures, further intensifying the spotlight on the Fed's policy direction. With the US core PCE data for May slated for release on Friday, the market is bracing for critical insights. This data is the Fed’s favored inflation gauge, and its outcomes are pivotal for forecasting the trajectory of interest rates. Currently, the annual underlying inflation is projected to have eased to 2.6% in May from 2.8% previously, with a modest monthly increase of 0.1% compared to April's 0.2%.

Investor sentiment remains on the knife edge as they scrutinize every Fed signal. Despite market expectations leaning towards the Fed commencing its rate-cutting cycle in September, Fed policymakers are advocating for a cautious approach. They emphasize the necessity of seeing a sustained inflation decline before considering any rate reductions. This divergence between market expectations and Fed guidance underscores the complexity of predicting monetary policy shifts.

US interest rate futures reflect this uncertainty, with a 59.5% probability of a 25 basis point cut in September and a 34.1% chance of a rate pause.

The British Pound has shown robust performance against several peers, driven by strong wage growth in the UK. However, it appears to be succumbing to mounting pressure from the US Dollar:

The Bank of England remains reticent on rate cuts despite market anticipation of easing from August onwards. Political uncertainty further clouds the GBP outlook, with the upcoming UK parliamentary elections adding another layer of complexity.

Overall, the USD's recent strength suggests potential gains in USD pairs, particularly if the Fed continues to signal a hawkish stance. Traders should closely monitor Friday’s US core PCE data, as it will be a crucial indicator of inflationary trends and potential Fed actions.