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Forex

What awaits the market after the FED meeting? Uncertainty and crisis

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market after FED meeting

Everyone is watching the FED stock market announcement closely. The attention of the markets is gradually shifting from inflation to the coming recession. The euro has fallen due to cuts in Gazprom’s gas supplies

What does the market have in store after the FED meeting? With the US interest rate hike this week and growing uncertainty over the Fed’s further policy tightening course, the dollar on Tuesday held close to its recent two-decade highs, while the latest gas supply cut in Russia kept the euro under pressure.

FED rate hike and stock market

FED interest rates and stock markets are closely linked. The U.S. Federal Reserve begins a two-day meeting later today and is expected to raise interest rates by 75 basis points. But many traders wonder if the slowing economy could shift the focus away from inflation and signal a slower pace of rate hikes in the future.

Futures contracts tied to the Fed’s discount rate show that rates will peak in January 2023, a month earlier than February, which they indicated last week, while long-term Treasury bond yields are down about 80 basis points from the highs of mid-June.

That helped push the dollar back about 2.8 percent from its 20-year high of 109.29 against a basket of currencies less than two weeks ago. By 08:30 GMT, the dollar had stabilized since the start of the day at 106.5, while against the euro it strengthened slightly to $1.0219.

However, while Fed rate expectations are waning, most analysts maintain an optimistic view of the dollar, noting signs of a global economic slowdown. Such concerns were reinforced Monday by a profit warning from U.S. retailer Walmart.

This followed several softer-than-expected U.S. and European data releases. Francesco Pesole, a currency strategist at ING Bank, attributed the dollar’s loss of momentum to the actions of traders who cut excessively “long” U.S. dollar positions.

“The trigger (for a flattening of positions) could have been a reassessment of the timing of the rate caps and a discussion of rate cuts,” Pesole said.

“But the Fed has less opportunity for dovish surprise compared to the ECB … Fed rate pricing is more or less in line with the regulator’s dot plot and inflation/economic growth forecast,” he added, referring to the chart reflecting each Fed rate hike as forecast by officials themselves.

The euro’s rise continued to be held back by uncertainty about Europe’s energy security as Russia said gas flows to Germany via the Nord Stream 1 pipeline would drop to 33 million cubic meters per day starting Wednesday. This is half of the current flow, which is already only 40 percent of normal capacity.

But the single currency’s reaction to the news has so far been subdued, even though it raises the risks of fuel rationing in Europe and an economic downturn.

Pesole said that the euro is preparing for bad news on the gas front, noting that “the reaction function to the incoming news is not as sharp and will not cause the same volatility as a month ago.

However, the euro could weaken if markets start to actively assess the European Central Bank’s impending rate hike – they have already lowered expectations for September, now, estimating a 39 basis point increase from 50 basis points last week.

Commodity prices are supporting Australian and New Zealand dollars. The Australian dollar hit a one-month high of $0.6984 as iron ore hit a two-week peak and traders awaited inflation data that could show a 6.2 percent annualized rise in consumer prices, the fastest in more than three decades.

“Depending on the data, a slight rise in the Australian dollar is possible,” ANZ Bank analysts said. “A 50 basis point hike from (the Reserve Bank of Australia) next week is almost a foregone conclusion – the main risk is a larger hike.”

In other markets, cryptocurrencies rebounded from last week’s gains. Bitcoin was worth $21,100, its lowest since July 18. Ether also reached its lowest level since July 18 at $1,421.

Market reaction to FED announcements is always bright, so keep an eye on the situation.

Forex

Dollar hands back gains after Israeli strike; weekly gains likely

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Investing.com – The U.S. dollar handed back early gains Wednesday in volatile action, as traders digested the reported Israeli strikes against Iranian sites and the impact on risk appetite.

At 05:25 ET (09:25 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% lower at 105.870, having earlier climbed as high as 106.190, just marginally below the five-month peak of 106.51 seen earlier in the week. 

Dollar hands back gains after Israeli strikes

The safe-haven dollar jumped higher earlier Friday following reports that Israel attacked Iran in an escalation of conflict in the Middle East, just a few days after Iran launched a drone strike on Israel.

This move marks a potential escalation in the Iran-Israel conflict, and could herald worsening geopolitical conditions in the Middle East, especially after initial reports showed strikes near locations holding Iranian nuclear facilities.

However, these gains have since dissipated after Iranian news agencies said there was no damage to the facilities, and the strikes have been seen to be rather limited in size. 

That said, the dollar is still likely to post a positive week as strong U.S. economic data and persistent inflation have prompted investors to drastically rethink the chances of the Federal Reserve cutting rates any time soon. 

A slew of hawkish comments from Fed officials have also helped the greenback, as evidenced by Atlanta Federal Reserve Bank President on Thursday saying that if inflation does not continue to move toward the U.S. central bank’s 2% goal, central bankers would need to consider an interest-rate hike.     

Sterling edges higher despite weak UK retail sales

In Europe, rose 0.1% to 1.0648, after fell less than expected in March, decreasing by 2.9% on the year, compared with a forecast 3.2% decline.

Additionally, Reuters reported the German government will raise its growth forecast for the German economy this year to 0.3%, from a previous forecast of 0.2%.

However, any euro strength may well be temporary with the now expected to cut interest rates before the Federal Reserve in an attempt to give the region’s struggling economies a boost.

climbed 0.1% higher to 1.2445, trading just above five-month lows despite British stagnating in March.

Sales volumes showed no growth last month, below the expected 0.3% increase, representing the first time that they have not grown in monthly terms since December.

Weakness in retail spending makes it more likely the will start cutting interest rates in the summer, probably before the Federal Reserve.

Yen boosted by safe-haven status

In Asia, traded 0.1% lower at 154.47, with the safe-haven yen boosted by the elevated tensions in the Middle East. 

The Japanese currency remained near 34-year lows, prompting caution over possible government intervention.

edged 0.1% higher to 7.2417, with the yuan near five-month highs amid uncertainty over the Chinese economy.

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Japan’s finance minister gives fresh warning on excessive yen moves

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WASHINGTON (Reuters) – Japanese Finance Minister Shunichi Suzuki said on Friday authorities would take appropriate action against excessive currency market moves, repeating his warning to investors against pushing down the yen too much.

There has been growing market interest in the timing and pace of a pivot by the U.S. and European central banks toward less restrictive monetary policy, Suzuki said.

“Uncertainty and market speculation over these developments have heightened volatility in financial markets, including foreign exchange markets,” Suzuki said in a statement to the International Monetary Fund’s steering committee.

“It is important that foreign exchange rates move stably, reflecting fundamentals, and excessive volatility is not desirable. We would take appropriate actions against excessive movements,” he said during the spring meetings of the International Monetary Fund and World Bank in Washington.

© Reuters. FILE PHOTO: Japanese Finance Minister Shunichi Suzuki speaks during an event about expanding health coverage for all during the IMF and World Bank’s 2024 annual Spring Meetings in Washington, U.S., April 18, 2024. REUTERS/Ken Cedeno/File Photo

A broad dollar rally driven by receding market expectations of a near-term U.S. interest rate cut has recently pushed the yen to a 34-year low, heightening the chance of currency intervention by Japanese authorities.

The U.S., Japan and South Korea agreed to “consult closely” on foreign exchange markets in their first trilateral finance dialogue on Wednesday, acknowledging concerns from Tokyo and Seoul over their currencies’ recent sharp declines.

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BofA lowers EURUSD year-end forecast to 1.12 amid Fed policy shift

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On Friday, Bank of America (BofA) revised its forecast for the currency pair, now expecting it to reach 1.12 by the end of the year, down from the previously anticipated 1.15.

The adjustment follows a change in the Federal Reserve’s interest rate policy, with the first cut now expected in December rather than June. BofA cited potential risks from the absence of Fed cuts and fluctuating oil prices.

The firm also highlighted the impact of escalating geopolitical tensions, rising oil prices, and persistently high U.S. interest rates on emerging markets (EM). These factors have been identified as significant challenges, prompting BofA to revise its forecasts for the exchange rate as well.

The bank now predicts the USD/JPY will climb to 155 by the end of 2024 and 147 by the end of 2025, which is an upward revision based on the latest Federal Reserve forecast adjustments.

BofA has also shifted its stance on the USD/JPY from a slightly short position to buying, indicating a change in their trading strategy. The firm noted that most of their positions are light, suggesting a cautious approach to currency trading at the moment.

In the broader context of currency market dynamics, BofA stated that a stronger U.S. dollar would likely depend more on real money movements rather than speculative trades. This perspective takes into account the actual flow of funds by institutional investors as opposed to short-term bets made by traders.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

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