For a change this week, we will focus solely on the broader developments within the market that have the most significant impact on daily trading.
Regardless of the troubles in Great British politics, the ongoing war in Ukraine plaguing Europe’s energy supply, or market intervention from the People’s Bank of China – the fundamental factors impacting FX markets most significantly are Dollar Strength and Federal Reserve policy.
Dollar strength is wreaking havoc worldwide, devaluing local currencies and forcing states to import inflation with costly but necessary imports like food or energy. It’s unlikely we will see a shift away from dollar homogeny any time soon, so the alternative would be convincing the FED to slow or stop raising rates, e.g. weaken the dollar to spare the world a deep recession. But a reasonably positive US job report at the end of last week makes it more likely that the Fed will raise interest rates rather than stop this cycle.
Come November and December, we may see a rise of up to 75 basis points, worsening the world’s issues. The path for the dollar to reach 120 (DXY) becomes apparent as there is no historical resistance at these levels. This is uncharted territory for the dollar.
Eventually, rates will start to become restrictive, and we will likely see a rise in unemployment. Once we reach an uncomfortable level of job losses in the USA, we should see the FED begin to slow its policy.
This is when other majors, such as EURO, can begin to claw back value. Whether this is possible largely depends on the war in Europe and energy prices. For the world’s markets to return to normality, we must see peace and low inflation.
Back to the present, the FOMC meeting minutes and the Producer Price Index are due on Wednesday. Consumer Price Index statistics are due on Thursday, and Retail Sales plus Consumer Sentiment is out on Friday.
Markets will watch these events closely for anything that could immediately change the FED’s hawkish path; until then, don’t fight the fed.