Foreign exchange trading reminder: The Fed hints at further large-scale interest rate increases, and the Bank of Japan decides to observe intervention measures in the foreign exchange market signal provider FX678

Foreign exchange trading reminder: The Fed hints at further large-scale interest rate hikes, and the Bank of Japan observes a signal of intervention measures in the foreign exchange market

Beijing time on Thursday (September 22) in early Asian trading, the US dollar index rose slightly and is currently trading around 114.44. The US dollar surged to a new 20-year high on Wednesday after the Federal Reserve raised interest rates by another 75 basis points and signaled a further huge hike at its next meeting. However, the dollar’s gains were limited as the Fed’s decision was highly anticipated. Still, the trend remains positive for the dollar for a while, as US rates are poised to move higher for a longer period, analysts said.

The Fed’s latest forecasts show its policy rate will rise to 4.4% by the end of the year before peaking at 4.6% in 2023 to curb uncomfortably high inflation, with no rate cut expected until 2024.

Fed Chairman Jerome Powell said at a news conference that lowering inflation is impossible without pain, reiterating his desire to act aggressively now and stick with it. He added that the Fed’s actions could lead to slower growth and higher unemployment.

The US dollar index hit a 20-year high of 111.64 on Wednesday before closing up 1.06 percent at 111.37.

Shaun Osborne, chief FX strategist at Scotiabank in Toronto, said:We expect the dollar to remain strong in the near term, but we’re still reluctant to consider additional, sustained dollar gains on top of that, and we think it’s complacent to discount downside risks now. “

The dollar has been significantly overvalued, he said. The dollar index is up nearly 16% since the start of the year, its biggest annual percentage increase since at least 1972, when Refinitiv began the data series.

Osborne also said US rate hike expectations were priced in by the dollar, with the federal funds rate, the Fed’s top policy rate, rising more than 100 basis points since August.

The euro closed up 1.32 percent against the dollar on Wednesday at 0.9836.HSBC economists expect EUR/USD to fall below new year lows in coming weeks.

Russian President Vladimir Putin called for 300,000 reservists to fight in Ukraine on Wednesday and said Moscow would respond with what he called “nuclear blackmail” in the conflict in Ukraine with its vast arsenal.

European currencies led the sell-off in foreign exchange markets, as Putin’s comments heightened concerns about the region’s economic outlook. Europe has already been hit by Russia’s squeeze on European gas supplies.

HSBC economists pointed out that although the euro against the dollar has found support at parity levels, but due to the strengthening of the dollar and a series of challenges facing the euro zone economy, the euro against the dollar will fall lower than this year’s lows in the next few weeks. On the positive side, the risks posed by the Italian general election on September 25 do not appear to be significant, while the market indicates that the mood of the Italian election has been mixed without a strong element of euro doubt. If political developments in Italy pose downside risks to the euro, those risks are also unlikely to materialize this month.

Compared to other currencies, the dollar rose slightly against the yen on Wednesday, reaching as high as 144.70, and finally closed up 0.25% at 144.07. Traders remained cautious about pushing the dollar higher given the threat that Japan would intervene to boost the Yen.

The Bank of Japan will announce its interest rate decision on September 22. IG Group predicts that it is expected to remain unchanged, focusing on whether there are foreign exchange intervention measures.

IG Group said the Bank of Japan is not expected to change its loose monetary policy stance on Thursday. Looking ahead, the probability that the Bank of Japan will raise interest rates by 10 basis points in October is only 11%, and the probability in December only 21%. Japan’s recent headline inflation rate of 3% indicates that the BOJ is under increasing pressure to change its easing policy, and if Japan’s inflation rate rises further above 3% in the coming months, the pressure on the BOJ’s policy change will increase further , Market participants are therefore keeping a close eye out for any change in attitude from Bank of Japan policy makers.

The IG Group also notedWhether the Bank of Japan will intervene in currency markets will be the focus of this week’s meeting, Bank of Japan policymakers are likely to continue to highlight concerns about a weaker yen at the meeting. Various events this year have shown thatWhile the BOJ is likely to push the Yen higher, the lack of any definitive follow-through could ultimately keep the USD/JPY trend intact.

GBP/USD fell to a new 37-year low of $1.1234 on Wednesday and was last down 0.98% at $1.1268.

Adam Dent, strategist at Santander, said: “Investor views on the UK’s outlook have clearly deteriorated, so the bar for further sharp deterioration is high. But the inexperienced new government faces huge challenges and is likely to mistakes, exacerbating investor concerns.”

Some respondents pointed to the ills of the global economy saying that the UK was not the only country facing challenges. ING economist James Knightley said: “We see fragile investor confidence in many regions and asset markets. That said, the UK looks weaker than most.”

Thursday’s key data and forecasts

Big things to watch on Thursday:The Bank of Japan announced its interest rate decision, Bank of Japan Governor Haruhiko Kuroda held a press conference on monetary policy, and the Bank of England published its interest rate decision and meeting minutes.

Summary of Organizational Perspectives

1. Rabobank: Putin’s speech will support dollar on safe haven demand

① Rabobank said that Russian Putin announced a partial mobilization, indicating that “the Russian-Ukrainian conflict may be on the verge of escalating into war.” That would put pressure on the euro and Eastern European currencies, and would also confirm the appeal of the dollar as a safe haven currency. Before these announcements, the exchange rate of the euro had not yet reflected the economic risks posed by the energy crisis;
② In our opinion, this news increases the downside potential of EUR/USD. EUR/USD is expected to trade around the 0.95 level between winter and next spring

2. Bank of America: Dollar could be stronger for longer

Bank of America said the meeting is expected to have less of an impact on the US dollar given that markets are currently pricing in a 75 basis point rate hike from the Federal Reserve this week, but that it expects The US dollar will remain strong for a longer period and possibly even stronger

3. Sony Financial Group: If the US and Japan rise above 150, Japan may intervene, but it is less likely

“If dollar-yen rises above 150 very quickly, intervention may be possible, but in reality, it is extremely unlikely given the ineffectiveness of intervention,” said Hiroshi Watanabe, senior economist at Sony Financial Group.

4. ING: Fed will remain hawkish until December 2023 policy shift

① Considering the Fed’s aggressive stance and the possibility that inflation will hardly change over the next month while job creation remains robust, ING expects the Fed to raise rates by 75 basis points in November;
② By the December meeting, only a 50bps rate hike may be needed as leading indicators show signs of easing price pressures, but weak economic activity data may be enough to persuade the Fed to act more cautiously. That means a fifth rate hike of 75 basis points cannot be ruled out. Despite the Fed’s hawkish stance, the market initially expects a rate cut of nearly 50 basis points in 2023;
③ ING Bank believes the Fed could turn to significant policy easing in the second half of 2023, and said the average time from the last rate hike in a cycle to the first rate cut of the Fed in the last 50 years. .

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