The markets are accounting for a chasm between the Fed’s monetary policy and USD vs its dovish counterparts – the Euro & the Yen. The divergence will not go on forever. When the gap starts to close, reversals may be in store forbes johnkicklighter.
In 2022, hawkish policy has spread to more of the developed world’s monetary policy authorities. The shift has exacted a considerable burden on the risk-favored capital markets.
To assess the impact of this same evolution on the foreign exchange market, consider the relative position of the two currencies that make up a pair. Let’s start with the greenback. It is influenced by the Fed, which is expected to lift the benchmark interest rate to 2.83 percent by the end of the year along with instituting balance sheet reduction, aka ‘quantitative tightening.
The market adage certainly applies to currency trading. If one of the most hawkish central banks can urge the currency to slide despite a distinctly hawkish move, the same can happen at the other end of the curve. There are two major currencies saddled with a dovish backdrop: the Euro and Japanese Yen. The Euro is the world’s second most liquid currency, and its 2022 slide in value has been significant. EURUSD is on the cusp of pushing to lows not seen in 19 years.It would be reasonable at this stage to say markets have priced in much for the Dollar and a hawkish Fed, and a significant discount to the Euro via its dovish European Central Bank.
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