EUR/USD: three reasons to buy the dollar

EUR/USD, currency, EUR/USD: three reasons to buy the dollar

FOREX Fundamental analysis on September 16, 2022

"Tightening the screws" from the Fed could bring the global economy to a standstill, and a global recession would slow down the United States economy even more. This negative scenario is more suitable for 2023, but on the eve of recessions the dollar will be bought like hotcakes, as large investors understand the risks of a possible recession and prefer to hedge in forex through a major protective asset.

The World Bank believes that if the tightening of monetary policy of central banks will not lead to the desired results, rates will continue to rise, and this may lead to a downturn in the global economy. In 2022, regulators are implementing monetary tightening at a pace not seen before. Next year, they are likely to continue their hawkish policy. The average rate is projected to rise to 4% in 2023, twice as high as in 2021. Underlying inflation would then be around 5%, so borrowing costs would rise to 6% in order to get prices back to target ranges.

The leader in rate hikes among the world's central banks is clearly the Fed. The futures market believes that the federal funds rate will be 4.4% at the end of the first quarter of 2023, and will hold at that level for at least six months. Deutsche Bank expects the Fed to raise the rate to 4.9%, and may raise above 5% if the United States labor market allows it.

For now, the Fed is not thinking about pausing on monetary tightening. CME derivatives give a 74% chance of a 75 basis point rate hike in September, and a 26% chance of a 100 basis point hike. The rate will rise to 3.25% or 3.50%, which could be considered a neutral level that, while not slowing the economy, is not stimulating it either. That is, these measures are not enough for the Fed to curb inflation, and it will continue to move in the same direction. Why should the dollar weaken in this case?

As far as EUR/USD is concerned, the pair has lost one of its main growth drivers - the rally of the stock indices, while the dollar gets support from the macroeconomic statistics. The latest releases were about unemployment claims decline and retail sales growth.

The United States economy is looking better than the competition and the hawkish Fed rate and demand for protective assets is strengthening the dollar's position. EUR/USD remains in the downtrend and is moving towards 0.97, though some experts believe the pair is already targeted at 0.95.

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Forex pair USD/JPY: the Yen retains the advantage
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Mar 30, 2023 Read
EUR/USD: will a lifeline help the dollar?
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Mar 30, 2023 Read
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Mar 30, 2023 Read
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Mar 30, 2023 Read
Forex analysis EURUSD: the dollar is stumbling more and more
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Mar 29, 2023 Read
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Mar 28, 2023 Read
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Mar 28, 2023 Read
EUR/USD: the dollar may still have a surprise
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Mar 28, 2023 Read
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