The US Dollar fell as investors lowered their expectations that the Federal Reserve will take a more aggressive approach to raising interest rates next week.
A 75bps rate hike is taken for granted, but more and more analysts are setting the Fed Funds target at lower levels than touted just a couple of weeks ago. The reason is that inflation expectations have decreased considerably after most commodities' collapse, and the economy's slowdown will presumably cause a drop in demand.
Meanwhile, the US earnings season is picking up steam. The results align with the forecasts, without any company yet with significant setbacks in their earnings. Yesterday, Charles Schwab Inc and Goldman Sachs earnings were published with higher-than-expected figures. And today, the earnings of major companies such as J&J and Lockheed Martin will be announced.
The market seems to be stabilizing, although still with some volatility, after the wave of doomsday forecasts in which the word ‘recession’ was predominant. It can be said that the Fed is doing well so far, with a good communication policy that is preventing a collapse of the markets without leaving behind the necessary normalization of monetary policy. The Treasury bond market is less volatile now, and bond yields largely reflect the interest rate hikes the Fed will make in the coming months.
A very different situation is the one facing the European Central Bank. At this Thursday's meeting, a 25-bps rate hike is expected, but it remains to be seen if this modest rise will be enough to deal with high European inflation. The problem facing the ECB is that more aggressive increases could destabilize peripheral bonds, especially those of Italy, which in addition to high debt, is immersed in political instability.
Despite the latest rally in the EUR/USD, they are motivated above all by the weakness of the US Dollar due to the improvement in market risk sentiment. The single currency may still be subject to downward pressure, even more so if the Russian threats to cut off the gas supply to Europe are fulfilled.
Sources: Bloomberg, Reuters