U.S. Dollar On The Rise Again

The US dollar performed poorly in the last week, excluding the last 20 hours. It declined on Monday and Tuesday but now is on the rise again.

The index has increased 0.30% and the EUR/USD has declined by 38 pips during today's Asian Session. However, when we switch to weekly performance, the EUR/USD remains slightly higher due to the increase on Monday and Tuesday. So why has the EUR/USD suddenly changed its trend?

EUR/USD price chart.

Comments last night from the St Louis Fed President when he advised that the US Central Bank’s actions aim to have the same impact as the 1990s rate hikes. Bullard said that the tightening of monetary policy then led to an economic contraction but also laid the foundation for serious economic growth in the second half of that decade. In other words, the regulator is attempting to slow the economy to lower demand. Investors took this as a hawkish sign that the Fed plans to continue increasing rates until it sees a significant change in the economy.

In addition, traders are preparing for the Federal Reserve Chairman’s testimony to the US Senate today anticipating further clarification on the Fed's intention. More specifically, they are hoping for an indication as to whether a further 50 basis points or 75 basis points increase in rates is likely.

Deutsche Bank CEO also spoke about the risks to the EU and US economy. He advised that a recession in both regions is likely as central banks are forced to tighten monetary policy to fight inflation aggressively. He agreed with increasing interest rates because the alternative is harsher economic conditions.

A member of the European Central Bank also commented on the risks of an “inflation psychology” in the region. According to the theory, when the consumer increases spending, trying to buy a product before the price rises, businesses raise selling prices, expecting that the demand growth will continue. This has occurred in petrol and diesel prices which has add to inflationary pressures, and fighting them through rate hikes is even more challenging.

The issue with inflation psychology and panic purchases is that it is also more challenging for businesses to determine the actual level of demand. The ECB also stated that the high level of savings has contributed to high demand even as inflation rises.

So we can see here how the fundamental picture has changed sentiment. The dollar index movement has formed a full price wave, with the last 20 hours not showing signs of a significant retracement or correction. The price has also crossed downwards to form the first “lower low” but has now approached the most recent support level. This is something traders will be looking at taking into consideration.

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