During the Asian trading session on Monday (December 26), as Western countries such as Europe and the United States entered Christmas holiday mode, the market trend was extremely light, and the fluctuations of the US dollar against major currencies almost stopped. The US dollar index was trading near the 104.00 mark consolidation . It is expected that the U.S. dollar index will continue to fluctuate near the 104 mark before the end of the Christmas holiday.
Since 2022, under the influence of factors such as the Federal Reserve's aggressive interest rate hikes and rising risk aversion in the market, the U.S. dollar has strengthened significantly. The U.S. dollar index once hit a new high in the past 20 years. Major non-U.S. currencies have been under significant pressure. The international currency market has been "changing".
Since November, as U.S. inflation data has gradually fallen, market expectations for a slowdown in Federal Reserve interest rate hikes have increased, and the dollar has begun to turn downward. The Federal Reserve announced a 50 basis point interest rate hike at its December interest rate meeting, confirming previous market expectations. This further put downward pressure on the U.S. dollar, and the U.S. dollar index once fell to 103.36, the lowest since June this year. In November alone, the U.S. dollar index fell by 5%, the largest monthly decline since September 2010. Since the beginning of November, the U.S. dollar index has fallen by nearly 9%.
HYCM Industrial Investment Analysis Team pointed out, "With the fall in inflation data and the slowdown in the pace of interest rate hikes by the Federal Reserve, it is foreseeable that the path of the Fed's benchmark interest rate has become clear, and similar previous violent interest rate hikes will not occur. This reduces the potential upside space for the US dollar. The outlook for the US dollar's trend in 2023 may completely change, which is expected to provide euro. Non-U.S. currencies such as the yen, pound and renminbi bring good opportunities for counterattack. "
However, the analysis team added: "In the short term, although U.S. inflation has peaked and declined, the Fed still seems to believe that inflation is too high and is too far from the 2% target. In particular, the strong job market may make inflation more sticky, so most Fed officials believe that interest rates should continue to be raised to combat inflation. The latest dot plot from the Fed shows that the The Fed interest rate peak will rise to around 5.1%, which Fed Chairman Powell also mentioned in the statement after this month’s interest rate meeting. Therefore, with this hawk playing the leading role, the U.S. dollar may not have a big reversal soon,”
3 factors to observe the future trend of the U.S. dollar
Factor 1: When is the end of the Fed’s peak interest rate
Federal Reserve Chairman Powell stated at the press conference after the December interest rate meeting that the pace of subsequent interest rate increases will be slower, but the endpoint interest rate will be higher than originally expected, which means that in the future, interest rates may become 25 basis points or 50 basis points per meeting, but the endpoint interest rate before the end of the interest rate hike cycle should be higher than the 4.6% level estimated in September, which is also a variable for the US dollar.
It can be seen from this month’s interest rate meeting that 17 of the 19 Fed officials expect interest rates to be higher than 5% in 2023. The median end-point interest rate forecast is 5.1%, 50 basis points higher than the 4.6% forecast in September, reflecting that the Fed will remain hawkish, and under this expectation, the US dollar is expected to rise at has received support in the short-term, and we need to pay attention to whether the Fed's hawkish interest rate hikes may exacerbate the possibility of economic recession. However, judging from the current data, it seems that economic growth is gaining momentum, so the upward trend of the US dollar will also face pressure. It is expected that the fluctuation range of the US dollar index before the first quarter of next year will be 102-107 in the short term.
Factor 2: The U.S. job market is slowing or strong
Overall, the U.S. job market is still strong. The latest non-farm employment report released at the beginning of this month showed that the number of non-farm jobs in the United States increased by 263,000 in November, much higher than market expectations of 200,000. The unemployment rate remained at 3.7%, still at a relative low in the past 50 years, highlighting that the overall job market remains strong.
Strong economic data will provide the Federal Reserve with more reasons to raise interest rates, and the dollar is also expected to benefit from it and rise. In addition, for the market, strong employment data will also create an expectation for investors: Will continuous interest rate hikes lead to an economic recession? This expectation usually causes investors to sell risky assets such as stocks and commodities, and buy U.S. dollars to seek hedging.
Factor 3: The speed of inflation decline
The latest inflation data released on the 13th of this month showed that the U.S. Consumer Price Index (CPI) increased by 0.1% on a monthly basis in November, much lower than the 0.3% expected by the market. As inflationary pressure gradually subsides, this also makes investors look forward to the Fed's monetary policy preparation to change.
In addition, the annual rate of the U.S. core personal consumption expenditures (PCE) price index released last Friday (December 23) fell to 4.7% from 5% in October, and the monthly growth rate also slowed from 0.3% to 0.2%, indicating that inflation continues to cool. In addition, U.S. consumers’ inflation expectations for the next year fell to the lowest in 18 months in December.
This means that if U.S. inflation continues to decline, the Federal Reserve will stop raising interest rates after interest rates reach the end-point peak level in 2023, which will face a huge test for the dollar. If the economy shows signs of recession, it cannot be ruled out that the Federal Reserve will restart the action of cutting interest rates, and a major reversal of the US dollar is expected to begin.
How to trade the U.S. dollar in 2023
Some analysts said that on the premise that the Federal Reserve has not stopped raising interest rates and the inflation rate has not returned below 4.5%, the U.S. dollar is still bullish in the long term; some traders pointed out that China's accelerated reopening will bring support to economic growth outside the United States, which can easily lead to pressure on the U.S. dollar, which has already been highly valued. Therefore, it is not recommended to establish new long US dollar positions, and investors should plan to reduce excessive US dollar positions .
HYCM Industrial Investment Analysis Team said, "The U.S. dollar index has fallen sharply since November, reflecting that the Federal Reserve and major global central banks that follow the Fed have begun to slow down the pace of interest rate hikes to ease the heavy pressure of the economic recession. As for the trend of the U.S. dollar in 2023, we believe it mainly depends on two aspects: first, the timing of the Fed suspending interest rate hikes. From the current point of view, the timing may fall at the end of the second quarter of 2023; second, global economyCan a successful soft landing be achieved against the background of interest rate hikes by major central banks around the world? Therefore, we believe that before these two factors are clear, the US dollar may fall into a wide range of fluctuations. "
No matter what, entering 2023, we can foresee that under higher U.S. dollar interest rates, global economic demand will further shrink. Major developed economies such as Europe and the United States are at higher risk of economic recession. European and American central banks may end the interest rate hike cycle earlier than expected. When the global economy initially stabilizes, the market's trading focus may shift from recession to recovery, and the U.S. dollar may start a trend downward cycle in 2023.
This article comes from the financial industry
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