The US dollar strengthened against risky assets. US stock indices once again posted new yearly lows, but later bounced back up from them. Therefore, there is hope for a bottom to be reached. The Asian MSCI Inc. index dropped today. This marked the eighth consecutive negative session, the longest since February 2020. The S&P 500 and Nasdaq 100 futures showed modest gains. Economic pessimism also hit commodities. Crude oil fell by almost 7% at the end of Friday. Iron ore also plunged by roughly the same percentage.
A speech by Federal Reserve Chairman Jerome Powell was the reason for this. He reiterated on Friday the central bank's commitment to lowering inflation, saying it was necessary not only for the US, but for the entire global financial system. "The Federal Reserve's strong commitment to our price stability mandate contributes to a widespread in confidence in the US dollar as a store of value. My colleagues and I are acutely focused on returning inflation to our 2% objective," Powell said at a conference on the global role of the US currency.
Notably, these comments came two days after the Federal Open Market Committee voted to raise the key interest rate by three quarters of a percentage point to a target range of 1.5-1.75%. This is the most aggressive interest rate hike in 40 years. According to expectations, it will push the economy into recession.
As a reminder, banks use the interest rate to set the cost of borrowing for the short-term loans they lend to each other. However, it is also used for a host of consumer products such as credit cards, home equity loans, car finance and mortgage lending, which actually led to the global financial crisis of 2008.
As it was pointed out, the sharp rise in inflation, which has jumped over the last year with the CPI rising by 8.6% in May compared to last year, creates a number of difficulties for the economy and the Federal Reserve, which has clearly been slow to address this issue in the last year. Moderate inflation of around 2% is good for economic growth. For this reason, rates should continue to be raised until prices return to this range.
"Meeting our dual mandate also depends on maintaining financial stability. The Fed's commitment to both our dual mandate and financial stability encourages the international community to hold and use dollars," Powell said. The Fed chair also referred to the role of the dollar in global finance, noting the importance of the QE program used by the Fed during the Covid pandemic. He also mentioned upcoming changes in the global financial system, including the use of digital currencies and payment systems.
According to him, digital currency, as has been pointed out by other Fed officials on several occasions, could help support the dollar as the world's reserve currency. "Looking forward, rapid changes are taking place in the global monetary system that may affect the international role of the dollar in the future," Powell added.
On Friday, the British pound collapsed against the US dollar. If the bears break below 1.2180 as of today's results, the pound will move straight up to 1.2100. Going beyond that range will lead to another move to the low of 1.2030. A correction is possible only after the breakout of 1.2260, which will lead to an immediate rally to 1.2330, where the buyers will face much bigger difficulties. In case of a bigger upward move of the pound, a renewal of 1.2400 is possible.
As for the euro outlook, it is expected that the upside move will not last long. The Fed policy will not allow the bulls to keep the market under their control for long. So, be extremely careful about opening long positions, even at the current levels. Obviously, it is very important for the bulls to gain something around 1.0500, otherwise the pressure on the trading instrument will only increase. Without a consolidation at 1.0500, the pair is unlikely to recover. This would open a direct path to 1.0440. A breakout of this support, too, will surely increase the pressure on the trading instrument, opening the possibility to test 1.0380 and 1.0310. The bulls will be able to rectify the situation, but only after an obvious return to 1.0550. After that, there will be prospects for a recovery to 1.0600 and 1.0640.
