By Amit Pabari
Fed hiked their interest rate by 25 bps in the 1st February meeting. That time too, Fed Governor hinted continuation of the hiking cycle. But the market ignored the fact and kept on discounting for one cut in 2023. But out of thin air, US economic data started coming on a position note or we can say that it surprised on the upside.
If Fed is more hawkish than ECB & BoE = ‘Bullish for USD’ and ‘Bearish for EUR & GBP’
If ECB & BoE are more hawkish than Fed = ‘Bullish for EUR & GBP’ and ‘Bearish for USD’
The Fed and ECB/BoE lead or lag the hawkish tone and the same results in bullish or bearish movement in the US Dollar index. Currently, we are in a state where Fed is more hawkish than ECB & BoE. The terminal rate (a rate at which Fed will top out its interest rate) is at the cycle high, above 5.30%. For the first time this cycle, the market is pricing in MORE than what the Fed is communicating, otherwise, it used to be the other way around.
But, in the case of the US Dollar index, one can say that “Mausam badal raha hai”! The flood (high tide) and ebb (low tide) are part & parcel of the US Dollar index. Below technical chart suggests that after the extreme bullishness of the US dollar index, we could see it finding resistance near 105.50-106.00 levels and reversal from there on.
In the upcoming weeks, ECB and BoE may start publicizing their hawkish zone as the difference between inflation and interest rate is still wider compared to the US. So green bearish arrow with ECB and BOE hawkish tone is expected to hit the given chart soon.
From the dollar’s side, let’s check the factors which could lead to a reversal in the US DXY.
Mixed job report- Next week, the US will be publishing a job report. The way many tech and other companies have laid off employees, eventually, we could see it reflecting over the job figure and tightness could take a breather.
US CPI: Although last month’s CPI came above estimates, the market expects lower inflationary pressure in upcoming months as energy prices have corrected more than 30-40% since last year. The same has been conveyed by the Fed chair in January monetary policy where he mentioned the ‘Disinflation’ word 15 times.
ECB and BoE could go more hawkish relatively: The way inflation and core inflation are sticky in Europe and UK, the central banks are likely to hike by at least 25 or may go with a 50 bps hike in the upcoming meeting. Recently, ECB president Lagarde said that ECB will do whatever is needed to return inflation to 2%. In the case of the UK, despite the country being set to be the only major economy to shrink in 2023 and wage growth increased at its fastest rate for more than two decades, the BoE is expected to hike further to make the inflation figure a single digit. Furthermore, a long waited Brexit negotiation over the Northern Ireland protocol has been struck by British Prime Minister Rishi Sunakand European Commission President Ursula von der Leyen. Further construction over the same could be positive for EUR and GBP.
Outlook on US DXY & USDINR
View on US DXY and impact on EUR & GBP:
The relentless bullishness in the US DXY from 100.80 to 105.40 was purely led by the stronger US economic data, hawkish Fed member’s speech, and relatively sluggish Europe/UK data. However, momentum in 2023 can not be expected like in 2022, meaning we will not see a one-sided view. Thus, the current year carries more up-and-down swings. And hence, we expect the US DXY to take resistance near 105.50-106 and revert towards 103-102.50 levels. The basis behind the same could be Fed, which could little calm down, and ECB/BoE could come forward and tone hawkish in March. Thus we expect EURUSD to give pullback towards 1.07-1.0750 levels and GBPUSD towards 1.2150-1.2260 levels.
View on USDINR:
After hitting the lowest level since Oct 20, 2022; the Indian Rupee recovered by 30 paise as US bond yields and the US dollar index fell from multi-week highs. Going forward, a reversal in the US Dollar index from 105.50 levels, RBI’s intervention in the 82.75-83.00 zone, FDI flows and brighter domestic economic data are pointing towards a positive setup for the Rupee carry traders. But the caveat to the given positives could be FIIs and geopolitical uncertainty. Putting factors on the weighing scale then the positives are likely to outweigh the negatives over the short to medium term. Considering the same, one can say that the chances of the breakdown below the support of 82.45 are almost 70%. If it manages to breach the same, then one can expect a mean reverting level of 82 and 81.50 over the short term.
(Amit Pabari, MD, CR Forex Advisors. Views expressed are author’s own. Please consult your financial advisor before investing.)