The US dollar struggles against its rivals on Tuesday after investors are increasingly convinced that the Federal Reserve (Fed) will freeze interest rates this year against the backdrop of the risks of a sharper slowdown in global economic growth.
The US Dollar Index has shrugged off the initial pessimism and is now pushing higher to test session highs in the 95.90 area. After three consecutive daily pullbacks, the index is now showing some signs of respite and is looking to extend the rebound to the vicinity of the key barrier at 96.00. The index has lost about 2% since mid-December, followed by a fall in US bond yield, as market participants have become increasingly confident that the Fed will not raise interest rates in 2019.
The US dollar stabilized against the Japanese yen after falling 0.2% earlier in the early Asian session, as traders predicted the tightening of the monetary policy by the US Federal Reserve will be suspended against a threat for delay of economic growth.
The Fed monetary policy
On Friday, Fed Chairman Jerome Powell told that the central bank is not going through a previously drawn path to raise interest rates and will be sensitive to the risks, which markets see as downward.
Jerome Powell’s colleague Raphael Bostic, CEO of the Federal Reserve Bank of Atlanta, who is not a member of the Federal Open Market Committee, added on Monday that the regulator might have to raise interest rates once more in 2019.
The Federal Reserve is listening to the market and the signs it sends. The US inflation has been good so far and hence the Federal Reserve may allow a break in the cycle raising interest rates.
The US dollar rose by 4.3% in 2018 after the Fed raised interest rates four times in response to strong domestic economic growth, declining unemployment, and rising wage pressures.
The expectations of the market participants for further monetary tightening by the Fed this year have changed significantly over the past few months, and some traders even believe that there will be a fall in interest rates this year.
Financial markets have been shaken by growing concerns about slowing global economic growth, especially in the United States and China, although Friday’s data showed growth of the US jobs.
Expectations for further rising interest rates this year will likely keep the US dollar under pressure.
The Euro fell by 0.2%, to 1.1448 USD, after touching the inflation peak of 1.1485 USD. The single European currency has risen by about 1.3% over the last three trading sessions, as the prospects for the US dollar weakened.
The rise in the Euro has surprised some analysts, as growth and inflation in the Eurozone remain weak, well below the forecasts of the European Central Bank.
The Euro sits at a critical inflection point. If the currency pair can establish back above 1.1500, it sets the stage for a bigger bullish move ahead. If, however, the market is unable to establish above 1.1500, it will keep the overall pressure on the downside, with risk for a drop back below the 2018 low around 1.1215 that exposes 1.0800 further down.
The British pound slightly rose, to 1.2787 USD, and traders expect the British currency to remain unstable over the next few weeks due to the problems surrounding Brexit.
The British Prime Minister Theresa May has to win the vote in parliament and get approval for the Brexit deal, or risk chaotic Britain’s exit from the European Union. Voting in the House of Commons will take place next week.
May’s chances of winning the vote seem weak as the tiny Northern Ireland Democratic Unionist Party, which usually supports its government, opposes the deal.
During the trade yesterday the British pound increased its value from 1.2724 USD to 1.2772 USD. This morning, the currency pair is traded at 1.2763 USD.
If the British pound crosses successfully the resistance range of 1.2802-1.2811 USD, it will target reaching and testing the zone 1.2832-1.2837 USD. Upon success, the upward trend may continue to 1.287-1.2887 USD.
if the pound fells below the support range of 1.2734-1.2726 USD, then the next support will be the zone 1.2684-1.2680 USD. In case of a breakthrough, the downward trend may continue to 1.2658-1.2650 USD.