The monetary race has started and the US dollar showed an immediate reaction. Today, the US dollar index has declined by almost 0.5% to a 3-week low amid expectations of the key interest hikes in other countries.
The market sentiment improved thanks to the positive US corporate reports and hopes that China is able to cope with the crisis in the housing market. As a result, stocks and some currencies increased. Traders began buying the Australian dollar and the New Zealand dollar. The Chinese yuan also gained in value.
The Australian dollar showed the best performance despite the dovish stance of the Reserve Bank of Australia. Notably, the regulator's representatives expressed concerns about the labor market condition and announced their intention not to raise the key interest rate until 2024. The AUD/USD pair reached a six-week high of 0.7474.
Earlier, the US dollar rise was supported by the expectations of monetary policy tightening by the Fed. The situation remained the same. However, judging by the Fed's actions, market participants have started to bet on the monetary policy normalization in other countries. Thus, the Bank of England may raise the key interest rate by 35 basis points. The Reserve Bank of New Zealand may also take such a decision. On Monday, it published its inflation report that unveiled the fastest growth in the last 10 years.
The UK and New Zealand reported a significant rise in the yield of short-term bonds. Notably, the growth was stronger than in the US.
"We had a big short position build-up in euro, Aussie dollar, Canadian dollars but after real U.S. yields fell back last week, it took some heat out of the dollar rally which means we are seeing some short covering now," Kenneth Broux, FX strategist at Societe Generale said.
Now, the pound sterling continues gaining in value. Although the ECB denies the necessity of monetary policy tightening, the euro is also climbing.
GBP/USD
Since the beginning of the week, the pound/dollar pair has been very active. On Monday, it closed in the green for the fourth session in a row. Traders are pricing in the 70% possibility of the key interest rate hike by the BoE by the end of the year.
From the technical point of view, the pound sterling is trading within the upward channel. The price is testing the upper limit of the range. However, analysts warn that the pair may show a technical correction before starting rising again.
The nearest support level is located at 1.3730 and next is at 1.3700. The resistance area is between the levels of 1.3800 and 1.3850.
EUR/USD
It is quite possible that the ECB will be the last central bank to tighten its policy. It is likely to be followed just by Switzerland and the Bank of Japan. Nevertheless, the euro is quite stable at the moment.
Some analysts, including the ones at Commerzbank, suppose that the euro/dollar pair may show a bullish rally towards 1.1746.
The nearest support level is located at 1.1620. The euro is likely to go on growing to 2.1670, 1.1690, and 1.1700 until bulls control the mentioned support level. If the pair closes below 1.1620, bears may become active and push the price to 1.1600 and then to 1.1550.
It is still too early to talk about the euro's recovery since the ECB is actively supporting the downtrend. Bank of France governor Francois Villeroy de Galhau said that the regulator had no reasons to consider the hike of the key interest rate until the end of the following year.
"There is no reason for the European Central Bank to increase rates between now and the end of 2022 as eurozone inflation is expected to fall back below the ECB's 2% target," Bank of France governor Francois Villeroy de Galhau said on Tuesday. After the comment, the euro declined below 1.1650.
Searching for a new impulse, markets will have to learn the US construction sector reports. However, the data will hardly affect the US dollar strongly as market participants are more focused on the monetary policy issues. That is why the Fed's announcements are of primary importance now.
USD has chance to rise?
This month, Joe Biden signed a bill to raise the US debt limit by $480 billion until December 3. It means that the US dollar is likely to gain in value.
At the moment, investors are monitoring the yield of Treasuries bonds and rising appetite for risk. All this may cap the US dollar growth.