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Fed is raising the rates again, cornering the USD for reactions
25.07.2022

The US Dollar is again in the spotlight this week as the Federal Reserve is scheduled to confirm its latest interest rate hike this Wednesday afternoon. In the previous week, the US Dollar had struggled even more against competing currencies. This has brought around the argument of whether the Dollar has reached its max or if there is still more to come?

This morning, the EUR/USD is on a slight decline as it had been on Friday, while the US Dollar is gaining against the Japanese Yen and the British Pound. The price action of major currency pairs are forming similar patterns and therefore seem to be driven by the US Dollar. Overall the price of the Dollar is still firmly in control and last week’s decline merely remains a retracement in the longer term trend. However, traders will continue monitoring the price movement to ensure that last week’s trend does not gain further momentum.

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Even with the slight negativity in last week’s economic releases, the US economy, and specifically the employment sector, remains strong. The stability of the employment sector and the continuation of high inflation enables the Federal Reserve to further look at increasing interest rates at an untraditional pace.

Most analysts believe that the Central Bank will most likely increase the Fund Rate by 75 basis points on Wednesday, bringing the rate to 2.5%. This will take the Fund Rate to its highest level since June 2019, 3 years ago. The 75 basis point increase is already priced into the US Dollar, however, the market will be looking for further price drivers. For example, does the Federal Reserve plan to keep increasing interest rates at the same level? Have they also discussed the risks involved such as economic contraction or a higher unemployment rate?

Another talking point which may prove to be a strong influencer is whether the Federal Reserve will increase interest rates by 75 basis points or a full 1%. An interest rate hike of 1% is extremely rare and has not been actioned since 1981. However, certain Fed members have made it clear over the past 2 weeks that inflation is extremely high and they would back a 1% rate hike. A higher rate increase may potentially result in further Dollar growth, but it is important that traders also analyze the price reaction.

Lastly, the US economy is scheduled to see many earnings releases over the next 5 days, including Mcdonalds, Visa, Microsoft and Alphabet. The market will be looking at the performance of these companies and their predictions on the US economy over the next quarter. This is likely to influence not only the stock market but the Dollar as well.

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