Market Overview

Investors are paying the penalty for not believing the Federal Reserve (Fed) and its promise to continue monetary tightening. After raising its interest rates to 4.75% from the previous 4.5%, the monetary watchdog has clearly claimed its hawkish plans to continue raising interest rates throughout 2023.

That has not impressed investors who were overwhelmed by enthusiasm as the Fed’s Chair Jerome Powell recognised that the pace of inflation has cooled. Many have suggested that this is a victory over inflation, but Powell has clearly indicated that it is too early to say this. “It would be very premature to declare victory, or to think that we’ve really got this,” he said.

The U.S. Dollar index, that was above the crucial support level at 101.3 points for three weeks before the Fed meeting on February 1, dropped to 100.8 points immediately after Powell’s press conference.

The European Central Bank (ECB) and the Bank of England (BoE) have raised their interest rates to 3% from 2.5% and to 4% from 3.5% respectively. But unlike the Fed, they have sent a message of possible curtailing of monetary tightening soon. This message was unexpected, and pushed both the Euro and the Pound down. The Dollar index returned to 101.6 points, above the strong support of 101.3. The strong Non-Farm Payrolls report for January pushed the Dollar further up.

According to this report the U.S. economy generated 516,000 new jobs, almost three times more that was estimated. The unemployment level dropped to 3.4%, a number that has not been seen for the last five decades, while average hourly earnings rose by 4.4%, beating forecasts of 4.3%. Such a violent demand for new employees in the U.S. does not only show positive development, but also an inflation sign. It is also a prerequisite for a solid interest rate hike cycle for the Fed. It seems that big money has started to believe the Fed more than other central bankers in Europe, where unemployment is higher and the economy is weaker than in the U.S. The same situation relates to Canada and Japan, whose currencies are also a part of the U.S. Dollar index calculation.

So why is the Dollar expected to fall if the Fed is continuing with his hawkish stand?

The Greenback is continuing up this week as U.S. 10-year Treasuries yields rose to 3.63% from 3.39%, and bets on another 25 basis points interest rates hike to 5% by the Fed in March rose to 94% from the previous 81%. Moreover, 72% of investors think that the Fed will continue up to 5.25% during its May meeting, while there were only 38% who believed in it last week.

What does this all mean for the near future? The Dollar may continue to go up gradually, but may not manage to go over the strong resistance at 103.7 points. The Greenback may roll back a little to 102.4-102.7 points. But afterwards, when it will have enough strength to break through the resistance at 103.7 points, it may go to 104.9-105.3 points.

This may mean a correction for the Euro to 1.0520, for the Cable – to 1.1890, for the Swiss Franc – to 0.9390, and for the Yen – to 133 against the Dollar.

The development mentioned above may also weigh on stocks. The S&P 500 index may have stronger chances to drop below 4000 points, while Nasdaq 100 may go below 11699 points. Inflation indications will be important in this regard. Inflation in the U.S. is expected to remain at 6.5% in January 2023 amid a strong labour market. If so, it may be another reason for the Fed to continue with interest rate hikes that may push the Dollar further up, and risky assets down.

Disclaimer:

Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.