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London RationalFX

RationalFX: The dollar is gaining traction

RationalFX: The dollar traded close to recent highs against both sterling and the euro yesterday as investors placed bets that the Federal Reserve will begin unwinding its emergency Covid policy support at this week’s interest rate decision.

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RationalFX


USD

Under the current asset purchase programme the Fed are committed to buying $120 billion worth of bonds to free up liquidity in the market to assist with the US economic recovery. Whilst the emergency stimulus has largely helped with the US economic recovery, the extra liquidity in the market has placed uncomfortably high inflationary pressures on the US economy which has resulted in “taper talk”. At today’s meeting, the Fed are widely expected to begin tapering monthly asset purchases by $15 billion while keeping the policy rate unchanged.

Naturally, the next step for the Fed after tightening monetary policy will be to raise rates. Currently, the Fed are expected to hike three times before the end of 2023. According to a recent survey, many economists expect rates to rise sooner than currently forecast with some economists now anticipating a hike in 2022. It’s likely that the prospect of the Fed hiking earlier than planned is also contributing to a stronger dollar this week. Investors will be keeping a close eye on the Fed’s language regarding the rate outlook and inflation expectations.

GBP

Sterling fell against both the euro and dollar on Tuesday as investors seemingly took risk off the table ahead of two key interest rate decisions in both the UK and the US.

Prior to this week, sterling had been trading close to recent highs against both the euro and dollar amid heightened expectations that the Bank of England would look to raise interest rates from record lows to 0.25% to tackle high inflation. Since then, sterling has depreciated by 1% against both the euro and dollar.

The move lower appears to show investors re-thinking their hawkish rate hike expectations in the UK as a string of less than impressive data releases have raised the chances that the BoE could keep monetary policy unchanged at this month’s meeting.

Key announcements

10:15 – EUR – ECB President Lagarde’s Speech

12:15 – USD – ADP Employment change expected to fall to 400,000 from 568,000 previous

14:00 – USD – ISM Services PMI (Oct) expected to rise to 62 from 61.9 previous

18:00 – USD – Fed’s Interest rate decision

18:00 – USD – Fed’s Monthly Policy statement

18:30 – USD – FOMC Press conference

Source : ETFWorld.co.uk

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