FOREX Fundamental analysis for September 28, 2022
In September new investors' fears of a global recession caused by tighter monetary policy by global central banks and the energy crisis were added to earlier fears. The International Monetary Fund believes that the reforms of the new British government will inflate inflation, which will force the Bank of England to act more aggressively and lead ultimately to a serious economic downturn. Moody's warns that tax cuts will have a negative impact on creditworthiness. The pound is collapsing and dragging the single currency with it.
The Bank of England's chief economist, Pew Hill, said that the government's new course requires adjustments to the regulator's monetary policy. This led to a sell-off in British bonds. Investors preferred European and most of all U.S. securities, which raised the yield on 10-year Treasuries above 4% for the first time since 2010. The S&P 500 continued its dive, forming its worst bearish session since February 2020.
An interesting situation has matured in forex trading. The Fed's competitors, the Central Banks of the world, are increasing the rates but instead of strengthening the national currencies they get the opposite effect. Only the U.S. dollar is growing. Although, of course, it is not so much a matter of regulators as of the Fed's confident policy.
The head of the Federal Reserve Bank of Minneapolis Neel Kashkari assures that this time the Federal Reserve will not repeat its earlier mistakes, when slowing inflation was deemed a victory and the central bank stopped following a hawkish course. The head of the St. Louis Fed suggests accelerating monetary tightening and raising the rate to 4.5% as soon as possible.
The dollar index remains the leader among other forex indices and this situation is unlikely to change in the near future. The BofA calculates that a 10% strengthening of the USD index would cut the average return on S&P 500 stocks by 3%.
In addition, demand for defensive assets was supported by the sabotage of the Nord Stream pipeline. Given the difficulties of the winter period, Bloomberg lowered the Eurozone's economic forecast by 1%. However, if the price of gas rises by another 50%, the GDP will already shrink by 5%.
The dollar is profiting from everything while the euro is accumulating problems. EUR/USD has room to go down. The nearest target we see is 0.92.
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