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The dollar stops its upward trend after the Fed rate hike; the EUR/USD returns above 1.02 (Daily analysis 28.07.2022)

28 Jul 2022 9:01|Bartosz Sawicki

As in June, the Federal Reserve raised interest rates by 75 basis points in July. Since March, the cost of money has been increased by a total of 225 basis points and is as high as it was at the end of the 2015-2018 tightening cycle. The dollar did not turn the decision into a rally; the EUR/USD exchange rate, with a gain of around 1%, returned to the vicinity of 1.02, the ceiling where it ended the previous week.

Currency exchange rates fall after Fed hike; source: Conotoxia

Yesterday's meeting confirmed expectations that further movements in interest rates are likely to be less decisive and dependent on economic developments. The reason behind this is the prospect of a sharp slowdown in economic growth. It should be noted that two more labour market reports will be published before the next Fed meeting (21 September). In about one month, there is a symposium of central bankers in Jackson Hole, which has frequently been used in previous years to announce changes in the direction of Fed policy. The most likely step in the context of the September and November meetings appears to be a reduction in the pace of tightening to 50 basis points.

Therefore, we are close to the point where monetary policy may be turning from an undeniable advantage for the dollar into a weight for the US currency. It will happen when the market considers US interest rate cuts, which could materialise in as little as a decade or so, as its leitmotif. In the case of the Fed, the bar of expectations has been raised exceptionally high, mainly due to the attitude of policymakers, but of course, also persistent inflation and a strong labour market. After all, US interest rates are already higher than the valuation of the target level for the eurozone hikes that have just begun.

Two points need to be highlighted here, which means that the space for the dollar to weaken in the coming months may be limited. Firstly, it is questionable whether other central banks will maintain their determination to tighten once the Fed starts preparing to cut rates. Secondly, the dollar (especially against the backdrop of the energy-challenged euro) is also favoured by US independence from gas and oil imports and its status as a defensive currency. Therefore, it is impossible to declare an end to the dollar's dominance over the single currency, which is also making a solid mark on the jittery and vulnerable Polish zloty. In the case of EUR/USD, it will only be possible to speak about the breakdown of the downtrend once the quotations have returned above 2017 low, which is located at 1.0350 and this spring held back the rate's decline. Our currency forecasts assume that the EUR/USD will return to 1.05 by the end of the quarter. The road to these levels will be curvy and bumpy: we expect continued high volatility and numerous fluctuations in the investment sentiment.

28 Jul 2022 9:01|Bartosz Sawicki

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.

See also:

25 Jul 2022 9:00

Currency markets turn from inflation to growth prospects (Daily analysis 25.07.2022)

7 Jul 2022 8:38

Exchange rates await Polish MPC move, the US dollar a hair away from a record high, euro at highest since March (Daily analysis 7.07.2022)

6 Jul 2022 9:13

Currency exchange rates head towards an even line, the dollar exchange rate with a new record high (Daily analysis 6.07.2022)

28 Jun 2022 9:08

Currency exchange rates tend to stabilize; the Norwegian krone has its five minutes, and the EUR/USD exchange rate struggles with the 1.06 handle (Daily analysis 28.06.2022)

Attractive exchange rates of 28 currencies

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