USD gains bearish momentum
The US dollar trend remains bullish. However, new data and events point to the fact that the trend will reverse soon. This is reflected not only by inflation figures for March but also by the Fed's forecasts.
The US dollar trend remains bullish. However, new data and events point to the fact that the trend will reverse soon. This is reflected not only by inflation figures for March but also by the Fed's forecasts provided in the minutes of the previous Federal Open Market Committee meeting. According to the regulator's estimates, the US economy will fall into a recession in 2023, which will force markets and the greenback to trade in the negative area or stagnate.
The Fed's minutes also included a presentation on the potential consequences of recent shocks in the US financial sector, which began in early March. Vice Chairman for Supervision Michael Barr reported on the resilience of the banking sector, but bank specialists still emphasize that the recent events would harm the economy.
The Fed expects GDP growth of just 0.4% in 2023. Given growth expectations of around 0.22% in the first quarter, the economy could potentially face negative growth rates in the second half of the year.
The forecast assumes a moderate recession but this statement somewhat confused markets. Investors began to price in concerns about the worsening economic situation in the world's largest economy. Against this backdrop, the US dollar weakened against major currencies. New Fed forecasts, including sharply slowing inflation, are prompting market participants to hope for rate cuts from the Fed later this year.
The US dollar index is gradually gaining bearish momentum. Now, it may drop below 101.20. The next stop is located at 100.80, the low of 2023. The GBP/USD pair rose above 1.2500, and the EUR/USD pair broke through the 1.1000 limit within a few hours after the latest Fed assessment.The euro's rise is in question.
The EUR/USD pair continued to rise after Wednesday's events. Notably, inflation in the US slowed to 5%, the lowest level since May 2021. However, the core inflation rose to 5.6% in line with the forecast.
The decline in inflation combined with the dovish tone of the minutes allowed traders to continue betting on a rate cut of more than 50 bps by the end of the year.
Since the ECB is expected to raise rates by about 75 bps this year, the EUR/USD pair is likely to continue rising. A breakout above 1.1035 may allow bulls to reach the high of 1.1175 recorded on March 31, 2022.
The euro's price also depends on risk appetite, which has also
dropped. Wall Street was affected by fears of a banking crisis. All three major stock indices closed in the red on Wednesday, even though the minutes of the previous Fed meeting showed some officials' desire to stop raising rates.
Just after inflation figures were published, the S&P 500 jumped but then retreated after reaching the key resistance zone of 4,150. Fears of banking shocks and evidence of a moderate recession at the end of this year will hardly allow stock investors to benefit from the possibility of monetary policy easing.
The pound sterling is at a crossroads
The future of the pound is too rosy at the moment. The recent events and factors pushed it to the 1.2500 level. To maintain this height and go higher, the pound needs some reasons. At the moment, figures for the UK's economic growth, which confirmed that the economy intends to avoid recession in the first half of the year, is the main driver of the currency.
In February, GDP remained unchanged, while economists expected growth of 0.1%. However, the disappointment was softened by other news. The January estimate was revised upwards, thus recording a 0.4% increase. Overall, it became clear that the UK economy would expand in the first quarter of the year.
Traders showed a positive reaction to this information, thus boosting the pound/dollar pair to 1.2515. The pound sterling is now about 3% higher since the beginning of the year and nearly 4% above its average annual rate. The question is whether the currency will grow further. Is the pound sterling able to hit 1.3000 or 1.2500 this year or is that the ceiling?
However, growth prospects have become more realistic. The economic result could have been higher if it were not for the February strikes, which significantly affected GDP.
PwC economists commented that the overall picture suggested that the combination of today's release and the revision of economic activity led to a three-month growth of about 0.1%. They also noted that the economy continued to stagnate, with economic activity struggling to exceed pre-pandemic levels.
Assessing the future dynamics of the pound sterling, traders will closely monitor not only the economic component in the near future but also try to see signals of the future of interest rate changes.
The GBP/USD pair faced resistance at 1.2525 before breaking the 1.2600 level.
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