After a rough couple of days at the end of last week on the back of better-than-expected US CPI figures, the American dollar got off to a good start this Monday, bolstering previous predictions that the greenback’s short slump was likely to recover for the time being. Federal Reserve officials continued to deny the notion of an impending pause in interest rate hikes. In particular, Vice Chair Lael Brainard cautioned that there was still work to be done.
This week, more major economies release their inflation figures. The UK’s CPI is expected to still be rapidly climbing. Canada, the EU, and Japan will also publish their various inflation stats with mixed forecasts as well. However the markets respond to the incoming data, traders and investors should be prepared to capitalize with a regulated and well-regarded broker, such as easyMarkets, in order to take advantage of both bullish and bearish conditions.
Just a blip in the bull run?
Last Thursday the US Bureau of Labor Statistics published its latest CPI data, whereby U.S consumer inflation came in at its lowest rate since January 2022, under the 8% forecast, at 7.7%. Investors suddenly saw possible signs of a slower rate of interest rate hikes on the horizon, and this, over the following two days, caused many of the major currencies to gain ground against the dollar.
There’s around a month between now and when the Federal Reserve is due to meet again to set its monetary policy for the next period before the holidays. Until then, investors will be watching incoming CPI data from a number of major economies for the remainder of this week and onwards. They’ll be looking for insight into what those updated numbers will mean for their respective reserve banks, and the possibility of seeing a continued or slowing tightening of monetary policy, which will affect the value of the USD against those related currencies.
Can the dollar keep climbing?
Whether the dollar continues to rise depends on a number of factors, one of which is certainly what the Reserve Bank decides to do next in its continued war against high inflation. As Fed Funds interest rates continue to climb, many traders receive higher yields from their American assets and will tend to favor further investments there, increasing demand and the value of the USD.
If other major economies likewise lift their interest rates in response to inflation, then investors may steer money away from the US back to other shores to earn greater returns there if their interest rates are higher than in the US. More demand for these currencies creates tighter supply, and therefore eventually leads to higher values.
With many other major economies suffering from astronomical energy prices and more immediate recession risks, like the EU and UK, they’re being much more careful with their rate increases so as not to tip themselves into a prolonged downturn.
Once the US reaches the target range of around 2% inflation and begins to reduce interest rates (hopefully by mid to late 2023, but more likely 2024), the dollar is likely to begin to cool relative to other currency pairs.
