The greenback is close to ending gains against the euro for a second successive week as investors consider a faster pace of monetary tightening by the Fed and do not expect similar action from the ECB
The EUR/USD pair sank by 0.7% this week, while the USD index rose by 0.5% to its high in 16 months.
UBS analysts said that they expected the dollar to be supported as a safe-haven currency amid slowing global economic growth and the Fed's reduction in asset purchases.
Fed officials consider raising interest rates earlier than they thought necessary just a few months ago as US inflation is rising and the national economy is gathering momentum.
This shift occurs as US President Joe Biden nears a decision on whether to nominate Jerome Powell as Fed chair for another term or appoint Lael Brainard to this post. Earlier this week, Biden made it clear that he could make a choice in the near future.
If Powell is nominated, the greenback will get another driver for growth as it is believed that Powell will take a more hawkish approach to interest rates amid higher inflation.
However, whoever is appointed the Fed chief will face the difficult task of achieving the regulator's two goals, stable prices and full employment. Moreover, they probably are getting more contradictory.
Both Powell and Brainard have said that they believed the current spike in inflation would subside the following year as supply chains recovered. They think the Central Bank should keep interest rates as low as possible to give more time for the millions of Americans who lost their jobs during the COVID-19 pandemic to get them.
Many FOMC officials support that view. However, the continued rise in prices calls it into question.
The day before, Chicago Fed President Charles Evans said that he was more open to raising interest rates the following year than he had been six months before.
Evans noted that an interest rate hike in 2022 might be appropriate if inflation proceeded to rise despite his expectations to the contrary.
Atlanta Fed Governor Rafael Bostic stated that in his view the US Central Bank could begin raising interest rates in the middle of the following year, based on the employment outlook.
Bostick said that according to their projections the number of jobs in the US would reach the pre-pandemic level by the following summer. He noted that it would be appropriate in that case to normalize interest rate policy.
In September, only half of the FOMC members thought they would have to start raising rates the following year, while the other half saw 2023 as more likely for the first rate hike.
It will become clear how much the views of Fed policymakers have changed when the Central Bank releases fresh quarterly forecasts on December 15 as the regular meeting of the regulator ends.
The futures market is currently pricing in three rounds of federal funds rate hikes before the end of next year.
Bank of America strategists believe the double whammy of higher inflation and higher wages will likely weaken the Fed. They note that the risks of an earlier regulatory rate hike, next summer or sooner are growing.
Bank of America strategists added that in case inflation expectations rose over the long term and consumers continued to react negatively to price increases, the Fed would more likely ease inflationary pressure using tighter monetary policy.
Meanwhile, a rate hike in 2022 seems a daunting task for the ECB, while EU inflation has already surpassed the regulator's 2% target and a new spike in COVID-19 cases threatens to slow economic growth in the region.
ING representatives said that at some point the market had started to expect the ECB to raise its key rate by 30 basis points in 2022. They believed that it was unlikely, although it would be necessary to reduce inflation in the eurozone the following spring before the market ended these expectations. ING representatives added that the ECB had made it clear that it did not want to repeat the mistakes made by Trichet by tightening policy in July 2008.
On Wednesday, member of the ECB Governing Council Isabel Schnabel noted that the regulator's decision to continue buying bonds was a sign that a rate hike was not inevitable.
Yesterday, ECB chief economist Philip Lane said that he did not think inflation expectations were above the ECB's target level.
Unless ECB policymakers change their view on inflation, the single currency is unlikely to attract players who consider the dollar to be a better alternative amid the Fed's hawkish sentiment.
The euro is at a 16-month low against the US currency at about $1.13.
Rabobank strategists believe that the Fed could raise interest rates by the second half of 2022, and that could make it harder for the euro to recover against the dollar.
The EUR/USD pair slowed down around 1.1290. However, Credit Suisse managers believe it is only temporary. Then the pair will make a break from this level and aim for 1.1020.
Bank experts said that the EUR/USD pair had found the bottom around 1.1290 (the 61.8% Fibo level of growth correction in 2020-2021). However, they noted that the top of the significant head and shoulders pattern remained unbroken and their basic forecast for the pair was further bearish. Experts added that in their view it was only a temporary break after which the pair would resume the downtrend.
They highlighted that resistance was marked at 1.1375-1.1376 and 1.1387, and from there the bulls would aim at their correctional target and stronger resistance around 1.1428-1.1438. Besides, bank representatives expected that the growth would be stopped there and the pair would turn southward again. They added that a breakdown of 1.1290 would open the way for bears to 1.1264-1.1255 and 1.1185, and then to 1.1075 and 1.1020.
