BLOG | March 23, 2022

Forex Update: Dollar Gains As Fed Signals Aggressive Rate Hikes

By Tad DeVan, Senior Currency Strategist, MTI

Week of: 03/21/22 – 03/25/22

It’s Wednesday and we’re back with our weekly Forex update. 

There’s a lot going on in the markets this week from crude oil price nearing $120 a barrel to countries reporting higher-than-expected inflation figures.

The Fed raised interest rates by 25 basis points (bps) last week and there’s still a lot of noise around this decision as investors are looking forward to the central bank’s comments on how it is planning to tackle rising inflation in the U.S. 

It has also announced six interest rate hikes in 2022 – which is a hawkish sentiment and one that’ll help the USD strengthen. Federal Reserve Chair Jerome Powell also said this week that it could use bigger-than-usual interest rate hikes if needed to bring too-high inflation to heel.

Meanwhile, crude oil prices have headed back towards $120 a barrel after data on Tuesday showed a large drop in already tight U.S. crude oil inventories. Apart from that, bad weather cut oil output from a key pipeline that runs from Turkey to the Russian Black Sea port of Novorossiysk. 

The pound was in action this week after data showed UK inflation hit a 30-year high in February. Consumer prices rose by 6.2% in the year to February on the back of soaring energy costs, fuel bills, and food prices. 

As for the Russia-Ukraine war, President Biden is set to meet key allies this week to discuss further sanctions on Russia and about preventing an escalation of the war. 

Taking cues from the above developments and some data releases, major currency pairs saw some big moves this week.

  • The U.S. Dollar Index (DYX) witnessed gains this week on the back of rising commodity prices and expectations of a faster tightening cycle by the Fed.
  • The euro saw losses this week as Joe Biden was to visit Europe this week for talks with European leaders about Russia’s invasion of Ukraine. 
  • The British pound edged lower even as British inflation rose last month. 
  • The yen hit a six-year low this week against the dollar due to rising commodity prices and also due to the Fed’s signal to aggressively raise rates this year.
  • At the time of writing, the DYX stood at 98.79 (up 0.31%), while the euro (EURUSD) was trading at $1.0980 (down 0.44%). 
  • The yen is currently trading at 120.92 per dollar (up 0.09%).

Note that the U.S. and UK have already barred Russian oil, and the European Union is deciding a similar move. And this is worrisome as rising crude oil prices can mean a double-edged sword for consumers in a high-inflation environment we’re currently seeing.

Traders will now track how oil prices move, developments on sanctions for Russia, and China’s decision to roll out further stimulus. 

Note that central banks are mainly responsible for maintaining inflation in the interest of sustainable economic growth. However, they’ve missed the bus in doing so during the last few years. The inflation bubble is blown out of proportion and any effort by the central banks to bring it back to normal levels now will come as a sudden blow to the party that’s been going on in the market.

You may ask – How will these events pan out in the coming months?

We’re not sure about that, but there will be many slips between the cup and the lip. 

And the markets will move with the news flow, making it a more challenging environment for traders.

However, times like these can offer the best opportunities in the markets to traders who take action. 

Just join a free webinar hosted by the Market Traders Institute where you will learn how Forex experts navigate these early signs of opportunities.

Click here to register now.

And if you are new to the Forex market, download this FREE ebook to know how you can avoid some beginner trading mistakes.

I hope to see you on the other side!

Until then, 

Have a safe and profitable trading week! 😀

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