US Dollar Sluggish Although The Fed Remains Hawkish

Money.nikaniku.com – US Dollar Sluggish Although The Fed Remains Hawkish. The US dollar index (DXY) is sluggish at around 104.35 when it enters the New York session this Saturday (26/6/2022). Federal Reserve Chair Jerome Powell’s testimony underscores the firm’s determination to continue raising interest rates to control inflation, but market participants have highlighted the side effects of a recession that could arise from this policy.

US Dollar Sluggish Although The Fed Remains Hawkish

Powell’s testimony on Wednesday underscores the urgency of a rate hike to bring inflation back to 2 percent, even though it could result in an economic slowdown or even a recession. On Thursday, Powell reaffirmed his commitment.

The Fed’s hawkish attitude usually encourages the strengthening of the US dollar. However, this time market participants responded more critically. The problem is, a number of economic data from the UK, the Eurozone, and the United States this week show signs of a real economic slowdown.

Traders then doubted the projected future interest rate hikes. Market data shows a decline in the projected terminal interest rate, namely the interest rate at the end of the upcoming “rate climb” cycle. The decline did not only occur in the Fed’s interest rate projections, but also the European Central Bank (ECB) and the Bank of England (BoE).

The Fed’s terminal interest rate projections declined from 4.1 percent to 3.4 percent, the BoE fell from 3.6 percent to 3.0 percent, and the ECB fell from 2.6 percent to 1.8 percent. This shift also reduced government bond yields, so that the rally in the currency exchange rate was also hampered.

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“While it is not yet confirmed that a recession is unavoidable, all the disastrous forecasts have dispelled expectations of aggressive tightening that market participants had been pricing in for major central banks. Monetary sponsors have moved from increasing their rate hike forecasts, to lowering their predictions of terminal rates, ” individualized association Raffi Boyadjian, Principal Investment Analyst at XM.com.

“Monitoring of the US OIS strip shows that the Fed’s tightening cycle calculations are now more shallow, with the first ‘rate cut’ almost priced in in the second half of 2023,” individualized association Valentin Marinov, head of G10 FX strategy at Credit Agricole.

“USD has generally been struggling to scale up its gains lately. This is partly because US interest rates and UST yields alike failed to hit new record highs,” continued Marinov, “It seems as though the market has concluded that the Fed has finally hit its hawkish peak. If this is confirmed in the coming week, it will strengthen our belief that a lot of the positives regarding the Fed are already factored in in an overbought and misrepresented USD.”

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