The US currency is steadily moving along the price spiral this week. However, experts fear that the current rise of the dollar may slow down amid the Federal Reserve's excessively aggressive monetary policy and the release of the results of the September meeting of the US central bank.
According to analysts, the greenback is getting more expensive amid another decrease in risk appetite in global markets. Investors are once again turning to safe haven assets, primarily gold and the dollar. The current situation contributes to the growth of the latter, although experts consider this increase to be unstable.
Currency strategists associate the USD growth recorded during five consecutive trading sessions with expectations about further tightening of the monetary policy by the Fed. After the release of encouraging statistics on the US labor market, market participants are convinced that the central bank will "let go of the reins" on the issue of tightening monetary policy as soon as possible. At the same time, more than 80% of experts expect the Fed rate to rise by 75 bps, and only 15% of them believe that this figure will not exceed 50 bps.
At the moment, traders and investors are focused on the minutes of the Fed's September meeting, which will be published on Wednesday, October 12. Market participants are waiting for new hints from the central bank about the future course of monetary policy, preliminary forecasts of the current situation and assessment of economic activity.
Statistical data on annual inflation in the United States will be released on Thursday, October 13. According to preliminary forecasts, in September, consumer price growth in America slowed to 8.1% from the previous 8.3%. Recall that since the beginning of 2022, this indicator has not fallen below 7.5%. Against this background, the Fed raised the key rate five consecutive times in order to combat galloping inflation. Experts and market participants fear that a new round of tightening of the monetary policy will provoke a recession. According to analysts, the markets secretly hope that the Fed will be able to stop the hawkish flywheel of monetary policy launched this year, but this is unlikely. There are no prerequisites for such a turn of events, experts believe.
Against this background, the US currency receives a powerful "boost" from the growth of profitability and the mass flight of investors into safe assets. As a result, the EUR/USD pair moved into a consolidation phase after a recent fall, reaching the 0.9700 mark. The current situation also helped the euro a bit, which remained stable against its American competitor. On Wednesday morning, October 12, the EUR/USD pair was trading at 0.9727, trying to win back the previous losses.
ING Bank's currency strategists are confident that in the near future the EUR/USD pair will drop to September lows and reach 0.9540. At the same time, by the end of 2022, the pair can test the level of 0.9200, the bank believes. According to other forecasts, the EUR/USD pair will continue to weaken in the first quarter of 2023. Analysts do not rule out a breakthrough above the parity level by the middle of next year.
The active strengthening of the greenback amid the tightening of the Fed's monetary policy will affect the global economy, JP Morgan bank is confident. According to Bob Michele, chief investment officer at JP Morgan Asset Management, a "relentless rally" in the USD will provoke turmoil in the global market. A strong dollar is a time bomb for the derivatives market, the investment director of JPMorgan Asset Management believes. The next round of USD strengthening will become a catalyst for the next global crisis, Michele emphasizes.
Further aggressive rate hikes by the Fed contribute to the "overheating" of the market and the US currency, the analyst believes. Against this background, the central bank, in an effort to overcome inflation, will raise the key rate to 4.75% and leave it at this level until it approaches the 2% target. The central bank will not stop and will not interrupt the tightening cycle, says Michele. The reversal of the current Fed rate is possible only as a result of fundamental changes in the economy.
Recall that this year the US central bank raised the interest rate by 75 bps three times in a row. According to recent statements by Fed policymakers, a fourth increase is possible next month. Earlier, representatives of the central bank noted that the rate hike will continue and it will overcome the existing barrier of 3-3.25%. At the same time, the US monetary authorities diligently avoid the topic of recession, believing that the economy will cope with it.
Earlier, US President Joe Biden announced the possibility of a "minor economic recession" in the country. However, it will not have a significant impact on the national economy, the head of state is sure. Earlier, Janet Yellen, the US Treasury Secretary, stressed that the country's financial markets are stable enough and nothing threatens them, despite the high volatility amid an increase in the Fed's interest rates.
