As we approach the Thanksgiving holiday in the USA, we can expect lower liquidity in the market but keep your eyes on it as we tend to have more volatility and overreactions during these periods. This week’s focus will be Wednesday and Thursday, with meeting minutes released from the FED and ECB.
The dollar kicked off the week strong after a month of decline against its key peers. Last weekend China recorded its first covid deaths in almost six months, sending alarm bells ringing, risk sentiment rising, and the dollar surging as a haven bet. It was a complete reversal of what markets expected as rumours had swirled that China would begin losing covid restrictions, but it will now face more lockdowns to contain further outbreaks.
Adding to dollar strength last week, FOMC members commented on moderation regarding interest rate hikes, but the overall message and rhetoric from the FED remain unchanged.
Much debate hinges on whether the USA has reached peak inflation, what is the terminal rate, and when we can expect it. Many analysts believe the final hike will be in February, maybe March, and from here, we can expect three more moderate 0.5% hikes. However, the FOMC minutes released this Wednesday may flip this narrative if the committee agrees that doing too little outweighs the risk of doing too much.
Outside of monetary policy, North Korea’s new ballistic missile tests, the continued war in Ukraine and a winter full of Covid and Energy shortages strengthen the dollar risk-off status.