Edge-Forex Forex

Dollar dropping as rate expectations rise

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Even if the onerous background of inflation and the consequent expectation for interest rate expectations were pushed beyond stratospheric levels, the drive higher risk core risk assets is likely to flag. A speculative movement in risk assets is a symptom of congestion rather than a trend. Alternatively, the Dollar appears to be making a more serious move as of this past session, which contradicts sharply with the conventional reading of FX pricing. Looking at US rate expectations via short-end Treasury curve rates (the 2-year was at 0.925 percent) and Fed Fund futures indicated rate estimates for 2022 (priced in at 81.5 basis points), the pressure is still growing.

However, it is a fairly gradual expansion following a period of very high inflation. While headline inflation of 7.0 percent is historically high, it is ‘in line’ with predictions. Furthermore, it is expected to peak shortly — or to begin to substantially impede US economic development. In any case, the push for Fed raises has likely peaked, with four rises in 2022 priced in and substantial anticipation of a first move in March. 

The US dollar is weakening as interest rate expectations and risk appetite rise. 

If you look at the Dollar’s trajectory over the last year, you’ll notice that it has risen significantly in anticipation of the hawkish policy environment in which we now find ourselves.

The Greenback will eventually price in the most hawkish perspective that is practicable. Consider that the Fed is unlikely to continue accelerating its monetary policy aspirations unless its colleagues do the same. Otherwise, disparities in policy bearings will induce distortions between economies, potentially leading to major difficulties. As a result, a more hawkish outlook for the US will raise anticipation of offsetting yields from equivalents, or its own rates will begin to recede. Notably, the 20-day correlation between the USD (DXY) and the US 2-year yield has reached its highest inverted level since 2014. This is not going to last.

If the USD is about to establish some equilibrium with its peers, the Pound is in one of the greatest situations to benefit. The UK rate projection is also hawkish, and the 1.3600 break is attracting a lot of attention.

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