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18.11.202209:19 Forex Analysis & Reviews: USD remains hostage to Fed's decisions

Exchange Rates 18.11.2022 analysis

After being in an upward trend for a long time, the US dollar begins to gradually lose its ground. However, the greenback is far from surrender: it can win back its short-term losses at any moment. The American currency continues to compete with the euro in a grueling price race in the global market.

On Friday morning, November 18, USD slightly depreciated against EUR after showing a steady increase on Thursday evening. The driver of this rise was the expectation of further tightening of the Fed's monetary policy. Toward the end of the current week, the dollar showed the best weekly result, having risen in price significantly over the month. Experts believe that the reasons for the steady growth of USD are the hawkish statements of the Fed representatives and rather strong macroeconomic data on retail sales in the US.

In addition, last week, the number of initial jobless claims in the US decreased by 4,000 to 222,000 against the forecast of 225,000. According to analysts, this indicates stabilization in the US labor market even though inflation remains stable. In the current situation, the rate hike by the Fed will be quite natural, experts believe.

Traditionally, the tightening of the Fed's monetary policy supports the USD, so the hawkish comments by Fed officials contribute to the appreciation of the American currency. However, despite the relatively positive dynamics, the greenback strongly depends on the Fed's decisions. The further trajectory of the US currency depends on the strengthening or easing of the current monetary policy. Currently, markets continue to evaluate its prospects and expect further tightening of monetary policy.

Concerns about a further increase in the key rate intensified after James Bullard, President of the St. Louis Fed, commented about the need for this step. He said that the rate hike was reasonable at this time and that the Fed would stick to its plan. Analysts think that James Bullard "has hammered the last nail in the coffin" of pausing the rate-hiking cycle. According to the official, the federal funds rate should rise to at least 5%-5.25%. This is necessary to curb inflation, says J. Bullard.

Market participants are cautious as they expect the interest rates to rise at the next Fed meeting scheduled for December 13-14. Most analysts predict an increase of 0.5 percentage points to 4.25%-4.50% per annum. At the same time, many experts admit that the Fed and other central banks, primarily the ECB, may consider slowing down the pace of monetary tightening.

So now, the greenback is going through a correction and retreating against the euro. If the ECB pauses the pace of monetary tightening, this will help stabilize the European currency, which is gradually beginning to strengthen. The euro might face some insignificant losses as the EUR/USD pair is holding in the consolidation zone. On Thursday, November 17, the pair failed to reach the high of 1.0400. On November 18, EUR/USD was trading near 1.0375. Despite the current setbacks, Scotiabank economists believe that the pair will reach 1.0500 in the near future.

Exchange Rates 18.11.2022 analysis

Currency strategists do not rule out a trend change but do not expect sharp rises and breakthroughs of the US dollar. In 2023, the dollar's rise will be more volatile and less stable, according to Goldman Sachs analysts. Still, this will not prevent the strengthening of the greenback which receives support from the Fed. However, James Bullard warns that despite the encouraging October data on inflation in the US, next year can present the Fed with a different scenario.

Larisa Kolesnikova,
Analytical expert of InstaSpot
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