The US dollar has managed to consolidate its positions in the short term. However, its long term outlook are uncertain, analysts say. Traders and investors, wary of USD sliding down in the medium and long term, are now set to take advantage of its ongoing rise.
On Monday, the US dollar steadily advanced against other major currencies. USD was boosted by recent statements of Fed policymakers that the US regulator would stay the course and continue its monetary tightening, despite lower inflation. According to the CPI data for October, inflation in the US fell to 7.7% from 8.2% a month prior.
According to Christopher Waller, a member of the Federal Reserve's Board of Governors, the key interest rate will remain high in the near future. Interest rates hikes will only be softened when inflation approaches the target level, Waller said. "We're going to need to see a continued run of this kind of behavior on inflation slowly starting to come down before we really start thinking about taking our foot off the brakes here," he added. Lower-than-expected inflation data sparked expectations of the Fed putting its rate hikes on hold in December. Analysts believe that the US central bank will increase the rate by only 50 basis points. Earlier the Fed was expected to move the rate up by 75 bps at its final policy meeting.
Economists predict that the US dollar could steadily decline in the next 6 months. They have urged market participants to be cautious due to a possible sharp reversal of USD. At the end of last week, the US currency fell to its lowest level since 2015. Lower-than-expected CPI data has put additional pressure on USD, making further aggressive Fed funds rate increases less likely.
Currency strategists at Citibank forecast that the current inflation data will determine the US dollar's trajectory for the rest of 2022. They point out several bullish factors for EUR/USD, such as lower spread between nominal and current yields, which gives support to the euro. Another such factor is large-scale investor purchases of unhedged euro ETFs. Major market players remain net long on EUR in their biggest bullish bet on the European currency since mid-2021. Furthermore, historically December has been the strongest month for the euro.
Despite these positive factors for the euro, the US dollar is supported by ongoing Fed monetary tightening. Hawkish statements by Fed policymakers are pushing the US dollar up. Early on Monday, November 14, EUR/USD hovered near 1.0311, trying to advance.
Strategists at Bank of America Corp. believe that USD is yet to pass its peak. According to Bank of America's survey of 98 fund managers, the majority of them expect the US dollar to peak in the first quarter of 2023. 75% of those surveyed believe that inflation will remain above 3% and that the Fed would not begin to reduce interest rates until 2024.