US Federal Reserve

 

The U.S. Dollar rally of 2022 may be in its final throes and in part because there's a risk of either a Volckerian Federal Reserve (Fed) decision next Wednesday or of a market disappointment with the outcome, and each could be enough to see 2022’s Dollar rush turning into a great U.S. Dollar flush. 

The Japanese Yen was slipping again in the penultimate session of the week but recent speculation about the prospect of direct intervention by the Bank of Japan (BoJ) to support the currency is not the only reason why the Yen may already have bottomed and could be on the cusp of a spectacular recovery. 

The latest data have vanquished hopes that U.S. inflation may be easing and are widely expected to have caused concern at the Federal Reserve barely a week out from September's interest rate decision, leading many analysts and economists to anticipate some of the strongest action yet from the Fed.

The Euro to Dollar rate sustained heavy losses after sharp increases in some U.S. inflation rates took the market by surprise but its earlier recovery from two-decade lows may have been merely delayed, rather than derailed, and in part because of the evolving Federal Reserve (Fed) policy outlook. 

The Japanese Yen's annual loss reached extreme levels at times this week, drawing increasingly stern protests from the Ministry of Finance, but there is a danger that market speculators driving this are unwittingly engaging themselves in a game of Russian roulette with lots of loaded chambers in the pistol. 

U.S. inflation has fallen lately but remains far too high for the Federal Reserve and with companies long overlooking its concerns when setting prices, the bank now appears to be reaching for its ‘Feddie Krueger’ mask and so there may be some risk of a Volckerian fright night for global markets on September 21.  

Dollar exchange rates fell during a keenly anticipated speech from Federal Reserve Chairman Jerome Powell on Friday but were quick to recover and place other currencies on the back foot as financial markets contemplated what his remarks could mean for the U.S. economy and interest rate outlook.  

The Pound to Dollar rate rallied briefly on Friday but was quick to give up its gains after Federal Reserve Chairman Jerome Powell said that companies and households will face a growing struggle as the bank lifts its interest rate further in an effort to bring down U.S. inflation.

The Federal Reserve’s preferred measure of U.S. inflation surprised on the lower side of economist expectations for July on Friday, echoing the official figures released earlier in August, although Fed officials have indicated that this is not enough to alter the path of U.S. interest rates up ahead.

Multiple pieces of recent economic data have offered early signs that U.S. inflation pressures may be moderating but minutes of July’s Federal Reserve monetary policy meeting make clear that these are unlikely to keep hawkish Fed officials from lifting interest rates to restrictive levels this year.

Federal Reserve Bank of San Francisco President Mary Daly said twice this week that bond markets are mispricing the outlook for U.S. interest rates and implied that a reset of expectations could be in store for the months ahead, which would have possible implications for the Dollar and other currencies. 

Dollar exchange rates were on course for a second consecutive decline in the final session of the week after the Federal Reserve (Fed) said that U.S. economic data will influence the remainder of its interest rate cycle and official figures showed the economy teetering on the edge of recession. 

The Pound to Dollar rate extended an almost nine day rally before being stalled by technical resistance on the charts after the Federal Reserve (Fed) indicated it would likely raise interest rates in unspecified smaller increments if market concerns about the trajectory of the U.S. economy prove to be well founded. 

The Euro to Dollar rate has reversed half of its July decline in a rally that may be an early warning of a market inflection point that would likely provide many currencies with relief from the recently relentless advance of the Dollar.

"Is the coast clear for a 100bps hike from the Fed on July 29th? Of course it is"

Federal Reserve policy tightening is already making a mark on economies and currencies around the world but minutes of June’s meeting suggested this week that its impact could grow when making clear that interest rates may yet rise beyond the “modestly restrictive” level currently in the Fed’s crosshairs.

The latest Forum on Central Banking in Sintra, Portugal, offered insight this week into the thinking of the European Central Bank (ECB), Bank of England (BoE) and Federal Reserve (Fed) while also providing clues about the things that will matter for their interest rate policies in the months ahead. 

Macro Hive thinks the Federal Reserve could keep hiking interest rates to a much higher peak (5.25% or more) than the market currently prices (3.5-4.0%).

The Federal Reserve will continue to hike by sizeable increments that will maintain conditions for further Dollar strength say analysts.

Dollar exchange rates pared away overnight losses in Europe on Thursday after Chairman Jerome Powell said there is broad support at the Federal Reserve (Fed) for lifting its interest rate to a “modestly restrictive” level during the months ahead in remarks that validated financial market expectations.