The US Dollar is again in the spotlight this week as the Federal Reserve is scheduled to confirm its latest interest rate hike this Wednesday afternoon. The US Dollar had struggled even more against competing currencies the previous week.
This morning, the EUR/USD is on a slight decline as it had been on Friday, while the US Dollar is gaining against the Japanese Yen and the British Pound. The price action of major currency pairs is forming similar patterns and therefore seems driven by the US Dollar. Overall, the Dollar price is still firmly in control and last week’s decline merely remains a retracement in the longer-term trend. However, traders will continue monitoring the price movement to ensure that last week’s trend does not gain further momentum.
Even with the slight negativity about last week’s economic releases, the US economy remains strong, specifically the employment sector. The stability of the employment sector and the continuation of high inflation enables the Federal Reserve to further look at increasing interest rates at an untraditional pace.
Most analysts believe the Central Bank will likely increase the Fund Rate by 75 basis points on Wednesday, bringing the rate to 2.5%. This will take the Fund Rate to its highest since June 2019, 3 years ago. The 75 basis point increase is already priced into the US Dollar. However, the market will be looking for further price drivers. For example, does the Federal Reserve plan to keep increasing interest rates at the same level? Have they also discussed the risks involved, such as economic contraction or a higher unemployment rate?
Another point that may be a strong influencer is whether the Federal Reserve will increase interest rates by 75 basis points or a full 1%. An interest rate hike of 1% is extremely rare and has not been actioned since 1981. However, certain Fed members have made it clear over the past two weeks that inflation is extremely high and would back a 1% rate hike. A higher rate increase may potentially result in further Dollar growth, but it is important that traders also analyze the price reaction.
Lastly, the US economy is scheduled to see many earnings releases over the next five days, including McDonald’s (NYSE:MCD), Visa (NYSE:V), Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOGL). The market will be looking at the performance of these companies and their predictions on the US economy over the next quarter. This is likely to influence not only the stock market but the Dollar as well.