Dollar Mixed After Market Correction, Fed to Stay on Track

Dollar Mixed After Market Correction, Fed to Stay on Track

Dollar Mixed After Market Correction, Fed to Stay on Track


The US dollar was mixed against its major trading partners early Monday amidst mounting pressures in the global economy.  Federal Open Market Committee’s declared that it is now acting meeting-by-meeting based on incoming data.

The dollar has corrected around 3% from its highs seen last month, according to ING Economics market note.  This has prompted a few questions about whether the dollar has peaked.

Many trading partners would hope that to be the case, but the reality is that the Fed is likely to stay on track with its tightening. ING Economic analysts think the dollar is more likely to retest its highs than correct much lower.

Driving this view has been consistent rhetoric from the Fed that it will not be blown off target by some softer activity or price data.

In fact, it now looks like US activity is accelerating again as lower gasoline prices leave more dollars in the pockets of US consumers.  The 2023 US recession narrative looks a tough one to sell near term.

The ECB’s second 50 basis points rate hike on 8 September may well conclude its tightening cycle.  Rate spreads and the energy income shock make it a very tough environment for the euro, according to analysts. EUR/USD should therefore drift near parity for much of 2H22.

A quick summary of foreign exchange activity heading into Monday shows that USDCAD rose to 1.2903 from 1.2777 at the Friday US close and 1.2778 at the same point Friday morning. Canadian manufacturing and wholesale sales data are scheduled to be released today.

The Bank of Canada’s monetary policy committee meets next on Sept. 7. USDJPY slowed to 133.3148 from 133.5218 at the Friday US close and 133.577 at the same point Friday morning. Japanese GDP rose further in Q2, finally recovering all of its losses from the pandemic, but still trailing other major economies in the recovery, data released overnight showed.

Other data showed that Japanese industrial production rose at a record pace in June. The Bank of Japan is expected to maintain its accommodative monetary policy stance at its next meeting on Sept. 21-22.

GBPUSD slipped to 1.2094 from 1.2142 at the Friday US close and 1.2137 at the same point Friday morning. There were no UK data scheduled for release on Monday.

The Bank of England meets next on Sept. 15 after a 50-basis point rate increase at its previous meeting, with another increase of the same size being priced in by markets.

USDEUR fell to 1.0207 from 1.0262 at the Friday US close and 1.0294 at the same point Friday morning. There are no EU data on Monday’s schedule. The next European Central Bank meeting is scheduled for Sept. 9 where a 50-basis point rate increase is expected.

Elsewhere in Europe, the Swiss franc continues to be guided higher by the Swiss National Bank. Sterling remains vulnerable to recession fears. Beyond some substantial fiscal stimulus, the sterling’s best hope is that the Bank of England delivers on most of the aggressive tightening currently priced into markets.  Surging gas prices also spell trouble for the central European -CEE4- currencies.

Emerging market currencies have enjoyed a mini-renaissance over the last month. But a difficult external environment makes it hard to sustain those rallies until the dollar turns.

#Dollar Mixed after Market Correction, Fed to Stay on Track#