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Forex Trading Market Report: Expectations of interest rate hikes have cooled again. Is the dollar’s rally over- Dec 2, 2022

Expectations of interest rate hikes have cooled again. Is the dollar's rally over

Forex Trading Market BBI Info

1. Market review: expectations for the Fed to slow down interest rate hikes have risen

Wen, the U.S. dollar index fell back to 1.05 million, a new low in August, and closed down 1.07% to 104.74. Non-US currencies soared, the US dollar fell 2% against the Japanese yen, the euro and the US dollar rose above 1.05, and the British pound against the US dollar exceeded 2% at the highest level, breaking through the three barriers of 1.21 to 1.23 in succession.

2. The U.S. 10-year treasury bond yield jumped 10 basis points to 3.50%. The U.S. 30-year Treasury yield fell 10 basis points to 3.633%.

3. Inflation data slows down, and the ISM and MarkIt manufacturing lines decline

(1) The core PCE price index in the United States recorded a monthly rate of 0.2% in October, the smallest increase since July 2022;

(2) The U.S. November ISM manufacturing index fell to contraction for the first time since May 2020;

(3) The final value of the Markit manufacturing PMI in November hit the lowest level since May 2020;

(4) The number of layoffs of challenger companies in the United States increased by 416.5% year-on-year in November;

(5) Atlanta Fed GDPNow model: lowered the U.S. Q4 economic growth forecast from 4.3% to 2.8%. Cooling data provides room for the Fed to slow rate hikes.

4. Federal Reserve officials expressed their position last night

(1) Federal Reserve Vice Chairman Barr in charge of financial supervision said that it may shift to a slower pace of interest rate hikes at the next meeting, and a 50 basis point rate hike is reasonable.

(2) The Fed’s top three and New York Fed President Williams said that the federal funds rate needs to be much higher than the inflation level, and it will take several years to reach the inflation target. (3) Federal Reserve Governor Bowman: It is expected that the policy rate will remain in a restrictive range for a period of time to reduce inflation.

5. The unemployment rate in the Eurozone recorded 6.5% in October, a record low.

6. Evans, the big dove of the Federal Reserve, will step down as the chairman of the Chicago Fed in January next year. Former Obama economic adviser Ostan Goolsby will take over and become the FOMC voter.

Forex Trading Market Market Viewpoints

1. The factors supporting the dollar this year are still in force

Although the dollar has seen a correction recently, the factors that have supported the dollar this year are still valid. In our basic forecast, the dollar will remain strong at the beginning of next year and will start a more sustained decline after the Fed ends raising interest rates. It is expected that in the first quarter of next year, Europe and the United States will reach parity, and the United States and Japan will reach 146. We expect the U.S. dollar to weaken from the second quarter, with Europe and the United States reaching 1.10 and the U.S. and Japan reaching 135 by the end of 2023. Our expectations for Europe and the United States are higher than consensus.

2. Are the days of dollar gains over?

The dollar has moved from a strong uptrend to range-bound, but a more sustained decline in the greenback may not be long before. We believe that the catalysts leading to a full reversal of the dollar are the cessation of interest rate hikes by the Federal Reserve, the end of epidemic prevention and control measures, and the weakening of European energy pressure caused by the Russia-Ukraine conflict. None of these have been fully achieved, but all three goals appear to be close. The U.S. dollar has become more expensive over the past year, raising expectations for a depreciation of the greenback as it returns to fair value over time.

3. Is the EUR/USD recent rally sustainable?

Economists at Scotiabank said steady returns in European equities relative to U.S. markets would help support the euro in the short-term, while pricing in a “peak Fed rate” would put more pressure on the dollar in the longer-term, providing support for the euro. Progressive (albeit modest) gains pave the way until 2023. The overall solid (technically bullish) rise in the euro yesterday will go some way towards offsetting the bearish price action seen in the euro earlier in the week, but new highs will be needed to give the euro a more pronounced and sustained boost. Support for EUR/USD at

1.0390-00 and 1.0300-20.

4. The next natural gas crisis may bring the euro back to parity Natural gas prices have fallen from their highs to boost the euro, and it seems that Germany’s recession risk has also been eased, but this respite may be very short-lived. In the spring and summer of 2023, it may be difficult to replenish gas stocks in Europe at current prices, as the reopening of Asia will intensify competition for gas. Although the recent improvement in risk appetite has led us to upgrade our forecasts for EUR/USD in the next 1 and 3 months, we still believe that the EUR may fall back to parity as the next natural gas crisis hits.

5. The United States and Japan should pay attention to this tail risk

We believe short-term treasury yields are likely to continue to move lower against the backdrop of a U.S. recession, with 10-year U.S. Treasury yields stabilizing at 3%, bringing our 6-12 month forecast for USD/JPY to 133. In the short-term, we expect USD/JPY to firm up a bit on a sustained rally in the interim to 137.

Inflationary pressures in Japan are slowly starting to build, and if there is a hawkish surprise from the Fed (and US CPI data), there will be upward pressure on 10-year US Treasury yields, as will USDJPY. The problem of imported inflation will run through Japan next year, coupled with the already rising core prices, will make the Bank of Japan in trouble. But if wage pressures pick up significantly in Japan, that would change the situation for the BoJ dramatically. Therefore, we believe that the US and Japan have tail risks, that is, Japanese inflation may prove to be non-transitory, and the 10-year Japanese government bond yield, together with the yen, will rise sharply.

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