On September 21, market analyst Gary Howes wrote that the dollar is expected to continue to be supported by the Federal Reserve’s sharp interest rate hike on Thursday. At 02:00 on September 22, Beijing time, the Federal Reserve will announce its interest rate decision, policy statement and economic expectations.
The U.S. inflation report for August confirmed to investors that the Fed could not slow down the rate hike cycle just yet, reinforcing expectations for another 75 basis points of interest rate hikes by the U.S. central bank, while the language suggested the Fed would maintain a firm commitment to keeping prices down.
The next “big moment” for the foreign exchange market, and indeed all financial assets, will be when the Fed finally adjusts and signals the end of the rate hike cycle.
Until then, the recent trend of a stronger dollar and lower U.S. stocks is expected to remain intact.
There may be no signs of a turnaround when members of the Federal Open Market Committee (FOMC) release their forecasts for the future direction of interest rates.
“With limited room for unexpected rate hikes, all eyes will be on the latest forecasts, especially the dot-plot forecasts,” said Francesco Pesole, a currency strategist at ING.
ING expects the dot plot to rise again, so the terminal rate will fall to the 4.25-4.50% range in 2023.
Revisions to other economic forecasts are expected to show some signs of a worsening economic outlook, but the concept of the overall resilience of the U.S. economy should remain the base assumption.
“From a foreign exchange impact perspective, we think the Fed’s hawkish rate hikes will maintain upfront interest rate support, while a very inverse yield curve should continue to support the dollar’s current good momentum,” Pessole said.
The FOMC meeting came amid entrenched dollar strength, which meant EUR/USD slipped back below parity and near 0.9900. Meanwhile, GBP/USD is testing fresh 1985 lows at 1.1333
Another U.S. dollar-friendly rate hike from the Federal Reserve could send both pairs to new lows.
Global stock markets are also likely to come under pressure as investors underestimate expectations for a future decline in corporate earnings and fear a global recession will persist into the second half of 2022 and into 2023.
Pessole said: “As the relationship between short-term interest rate dynamics and most G10 currency pairs has weakened recently, much of the market’s reaction is expected to be driven by the reaction of global equities – in this regard, the Fed remains hawkish and likely Not to be seen as good news, which is another reason why we expect the safe-haven dollar to remain in buying.”
ING’s view is that EUR/USD could test the early September lows of 0.9900 following the Fed statement, and a break below that could see EUR/USD fall further to support at 0.9800.
As for GBP/USD, Pessole said, based on the positive reaction of the U.S. dollar to the Fed statement, he sees a new low for GBP/USD, possibly below 1.1300.
Also, according to Pessole, the Fed could have an impact on EUR/GBP. “The pound is more sensitive to a potential adverse reaction in equities than the euro, implying an upside risk for EUR/GBP (possibly re-approaching 0.8800),” he said.
He added: “There is usually a bit of a wait-and-see attitude in sterling crosses ahead of a major BoE announcement on Thursday, but the FOMC and upcoming news on domestic policy advice means sterling is likely to continue today. fluctuation.”
Beijing time at 20:12 on September 21, reported 1.1337/39.