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Increased inflation and a potential 1% rate hike triggers US Dollar Strength

Over the past 16 hours, the US Dollar has seen volatility levels increase to over 125 PIPs as a large number of traders entered new positions based on the latest inflation figures. Since the release of June’s Consumer Price Index, the market has also been influenced by a potentially more restrictive Federal Reserve and the risk of recession which has reached a new high.

The price movement of the EUR/USD witnessed both bullish and bearish price movements after the CPI figures were released. The EUR/USD significantly moved in favor of the US Dollar but soon after lost momentum, before correcting back in favor of the Euro. The correction was not necessarily triggered by negative fundamentals but may have been due to traders cashing out profit after such a strong and quick downward movement. After the price corrected to 1.0121, the US Dollar again gained control of the market and moved back downwards.

EURUSD - 14.07.2022.jpg

The USD/JPY, on the other hand, is seeing even stronger domination of the US Dollar as it continues to gain against the Yen. The price of the US Dollar has increased by over 1% within the last 3 hours. The exchange rate has once again climbed to new highs. Similarly, the US Dollar Index has increased by 0.51% today and also recorded a new price high for 2022.

USDJPY - 14.07.2022.jpg

So, we can see here that the US Dollar is gaining momentum and still remains in demand. So what is influencing traders to opt for the Dollar?

Firstly of course we have the Consumer Price Index which was released yesterday afternoon. The CPI was confirmed as 1.3% which is 0.3% higher than the previous month and 0.2% higher than what was predicted by the market. This brought the US inflation rate to 9.1% and is bringing the US economy closer to double digit inflation.

Of course, the high level of inflation is a concern for economists and increases the risks of a recession. And although recession risks are currently applicable to pretty much all economies, the Federal Reserve is currently the most hawkish. Previously it was believed that the Fed may increase interest rates by 50 or 75 basis points. The FOMC was split between some members opting for 75 basis points, others for 50, and others, such as the Chairman, preferred to wait for the latest inflation figures. However, now there is even talks of the Fed potentially considering a 1% rate hike which is something rare in western economics. Though this cannot yet be confirmed, it has without a doubt lingered in traders' minds.

In addition to the potentially more restrictive Federal Reserve, the market is also being influenced by the reported increased risk of seeing a recession in the autumn or winter months. The 10 Year 2 Year Spread, also known as the USYC2Y10, has been significantly declining over the past few months which is partially why economists have projected a recession. The index, which normally is the forerunner before a recessionary period, has recently declined to below 0. Yesterday, the USYC2Y10 declined again to levels not witnessed since 2000.

The fear of a recession has once again sparked further demand for the safe haven currency. This can also be seen when looking at global stock markets and the cryptocurrency market. This morning, both European and US stock futures are down as are most cryptocurrencies.

When analyzing the charts and the US Dollar index, it is clear that the USD continues to make strong advances. Markets will continue to evaluate the economic figures which are scheduled to be released this afternoon and tomorrow. But in addition to this, traders will, of course, be paying close attention to the reaction of members of the Federal Open Market Committee.

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