US dollar forecast:
- U.S. dollar Friday’s gains due to risk aversion, but huge losses this week
- The Fed’s decision to drop its hawkish guidance will help stabilize sentiment soon, but the timeline is uncertain
- Markets started to cut prices for this year, creating a bearish backdrop for the greenback
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The US dollar, according to the DXY index, rose on Friday afternoon, up about 0.5% to 103.11 amid risk-off mood, but was on track to drop 0.7% for the week after the recent slide in US Treasury yields, which was accelerated by a bank hike. The Federal Reserve at its meeting in March.
On Wednesday, the Federal Reserve raised interest rates by 25 basis points, in line with expectations, but signaled that its cycle of hikes may be nearing an end in response to jitters about US banks in the wake of the swift and unexpected failure of the two-step halfway point. Regional volume lenders (SVB and SBNY).
The turmoil in the banking sector that sent tremors on Wall Street earlier this month is likely to trigger a credit crunch for households and businesses in the coming months, triggering a credit crunch. Meaningful anti-inflationary operation. This will relieve pressure on the central bank, which will limit the need for excessively restrictive policy.
The economy does not yet reflect the real challenges that will result from stricter lending standards, but the negative effects will soon be felt. The forward-looking markets realize that liquidity will shrink due to recent events, and so have already started pricing in this year’s interest rate cuts.
The chart below shows how the 2023 federal funds futures contract discounted a rate of 3.96% in December. This means several reductions in borrowing costs from current levels by the end of the year.
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2023 Term Funds Implied Returns
While the Fed has opposed its 2023 easing policy, its actions are indicative of this Financial stability will be prioritized over economic inflation battle, which is a slower moving problem. In this context, it is only a matter of time before the Fed succumbs to “fiscal dominance” and shifts to a full-blown dovish stance.
Given that the Fed will soon reverse course and stand up Ready to act if necessary to contain systemic risksThe US dollar is likely to remain on a depreciation path. Certainly, uncertainty remains high, but sentiment should soon stabilize, as the Fed and other US authorities support any fallout from the banking system at all costs.
In terms of technical analysis, the US dollar is showing a negative bias after sharp losses since March 9, when prices were rejected by cluster resistance and dropped below a long-term ascending trend line.
With this backdrop, the path of least resistance seems to be less downside, but in order to be convinced of the bearish narrative, a break below the support at 102.00 (50% Fibonacci retracement of the January 2021/September 2022 advance) is needed. If this scenario plays out, the focus will move to the February low.
On the flip side, if the bulls regain control of the market and push the DXY higher, the initial resistance comes at 104.00, followed by 104.60.
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USD Technical Chart (DXY)
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