Understanding the dynamics of the foreign exchange market is crucial, especially when the USD is exhibiting significant strength amidst various global events. Central to this understanding are the principles governing central banks, including forward guidance, monetary policy, interest rates, QE, QT, and more.
Several factors contribute to the continued strength of the USD this year. High inflation rates, soaring unemployment numbers, and a consistent influx of funds into the dollar further bolster its position. Meanwhile, retail investors are actively selling the dollar, increasing its liquidity and attractiveness.
Conversely, the EUR presents a contrasting scenario. Despite initial expectations of a rate cut by the FOMC in March, subsequent market indicators suggest otherwise. The rhetoric from FED members, shifting from neutral to hawkish, indicates a potential reluctance to further cut interest rates, given the persistently high inflation and unemployment rates. Such a scenario could lead to dangerous inflationary spirals if not managed carefully.
Additionally, factors such as the reduction in M2 circulation contribute to the appreciation of the USD. Despite challenges like high interest rates and inflation, the real estate market continues to thrive.
A significant shift in the EUR occurred following a statement from a member of the European Central Bank (ECB), suggesting a willingness to initiate rate cuts independently of the FED. This prompted investors to divert funds away from the EUR, leading to outflows and subsequent inflows into other currencies, potentially including USD and gold.
As history often repeats itself, the current market trends indicate a likely further decline in EURUSD in the coming week, with a bias towards reaching the 1.05 mark, considering the above factors.
Market commentary and analysis from Luca Santos, currency analyst ACY Securities
