US dollar firms in risk-off trade

Philip McHugh September 21st 2022 - 2 minute read

The US dollar struck higher on Tuesday, bolstered by a bearish market mood.

Meanwhile, trade in the pound is mixed so far this morning, with GBP/EUR climbing to €1.1448 and GBP/USD sliding to $1.1336. GBP/CAD is rangebound at C$1.5172, while GBP/AUD and GBP/NZD hold steady at AU$1.7016 and NZ$1.9277, respectively.

Looking ahead, will an oversized interest rate hike from the Federal Reserve catapult the US dollar even higher today?

What’s been happening?

The US dollar strengthened through yesterday’s session, with demand for the safe-haven currency being underpinned amid a prevailing risk-off mood.

This cautious mood came amid fears over events in Ukraine and fears of a looming global recession.

Reinforcing the US dollar’s gains was an uptick in US Treasury yields ahead of the Federal Reserve’s impending interest rate decision.

The strong negative correlation between the euro and US dollar led the single currency to weaken on Tuesday, with the EUR/USD exchange rate dropping back below parity.

The single currency remained muted in spite of comments from European Central Bank (ECB) President Christine Lagarde, in which she signalled the bank is likely to continue to raise interest rates.

The pound, meanwhile, struggled to find any strong directional bias during yesterday’s session, with GBP investors playing it safe ahead of the Bank of England’s (BoE) rate decision on Thursday.

What’s coming up?

All eyes will be on the Federal Reserve today as the US central bank is set to deliver its latest interest rate decision.

Consensus forecasts predict another 75bps interest rate hike from the bank this month. However, there is an outside chance of a 100bps increase.

A bumper hike could see the US dollar skyrocket this evening. Otherwise with a 75bps hike largely priced in any movement in the ‘greenback’ is likely to be tied to the bank’s forward guidance, with a hawkish outlook likely to lend some support.

In the meantime, the euro has plummeted this morning as the war in Ukraine looks set to escalate following Vladimir Putin’s announcement of a ‘partial mobilisation’ of Russian forces.

In the UK, the Confederation of British Industry’s (CBI) latest industrial trends orders index could act as a headwind for the pound this morning. As economists forecast factory orders will have declined again this month.

Written by
Philip McHugh

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