The Federal Reserve surprised markets with its statements pertaining to a possible rate hike before the end of the current year. Fed Chairman Jerome Powell said at least one more increase will be seen, however, from the market's perspective, this could be the worst possible scenario since high interest rates could lead to a recession. Also, as no economic downturn could be perceived at the moment, the Federal Reserve will unlikely ease the monetary policy in the near future, meaning that interest rates will remain high for quite some time. Logically, this situation should have led to a sharp strengthening of dollar, but it actually weakened, albeit not by much.
As for the European Central Bank, a 0.25% increase may be seen, which will push rates to 4.25%. But in light of Powell's statements yesterday, the subsequent press conference by ECB president Christine Lagarde became even more significant, as what matters now is not how much the rates will eventually increase, but rather the adequacy of the central bank's actions given the current circumstances.
Interest rates are significant for the market in terms of borrowing costs and the returns on various instruments, but what is important is how well the level of the refinancing rate corresponds to the overall state of the economy. Even if interest rates are reduced to favor the markets, it could have a destructive impact on the economy, causing everyone to suffer, including the markets. Therefore, if Lagarde's statements are interpreted by investors as more appropriate, dollar will come under even greater pressure.
