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Will the dollar provide surprises? First steps to growth

Will the dollar provide surprises? First steps to growth

Analysts believe that the dollar will be able to provide many surprises to the bears this year. There is no doubt about it: the greenback has already demonstrated its powerful capability to recover even when it's at the price bottom. According to experts' observations, the USD has now started a gradual movement towards an uptrend.

For several months, the U.S. currency has been falling on market expectations regarding the Federal Reserve's refusal to further tighten monetary policy. However, this did not happen, due to which the dollar retained room for maneuver. Meanwhile, market participants are counting on another rate hike from the European Central Bank and continuation of the euro rally. This is encouraged by such factors as falling gas prices in Europe and the recovery of China's economy after getting rid of Covid restrictions.

However, many experts and traders doubt that the euro would rally and the dollar would fall, although the latter left its September peak and by the end of 2022 declined by 11%. Earlier last week, the so-called "death cross", a technical pattern which shows that the dollar will continue to get weaker, appeared on the USDX index chart for the first time in 2.5 years. However, the negative outlook is unlikely to be confirmed in the near future.

According to The Economist, the greenback is preparing an unpleasant surprise for the USD bears. According to analysts polled by the publication, the negative factors for the greenback have long played out, so you should not count on its fall. Experts also consider investors' doubts about such developments as a weighty argument in favor of the dollar's growth.

One of the important reasons for the dollar's recent growth is the current monetary policy of the Fed. The central bank has been steadily raising rates throughout 2022 and has done so much faster than other central banks. This has made the USD a "good carry trade target," according to experts. Recall that this process is characterized by selling low-yielding currencies to buy higher-yielding ones. This makes it possible to earn on the difference between them.

However, investors and analysts were ready to revise their forecasts for the dollar as the pace of tightening by the Fed began to slow. According to preliminary estimates, rates will peak in 2023, but it will be higher than the planned 5% per year. At the same time, the rate cut will be gradual. Such a position from the central bank may provoke another round of carry trade in the market, strengthening the dollar's position.

According to currency strategists, the possible onset of a recession in the U.S. has little effect on the dollar's values. The U.S. currency is confident both in the conditions of economic recession, and with a further rise. Traders call this phenomenon a "dollar smile" and consider it "ominous". Problems in the U.S. and world economies add to the appeal of dollar assets. In such a situation, investors rate them as safe and begin a mass flight to USD.

The currency strategists of JPMorgan are also sure that in 2023 the greenback will continue to be in demand, though it will not show impressive results. The bank analysts have raised the target for the euro to 1.1000, but they advise not to "chase the profit" by buying the EUR/USD pair at the current levels.

Many economists pay attention to a gradual decline in the EUR/USD pair. UOB Group emphasizes that the upward momentum is losing its previous values. Earlier, analysts noted that price movements in the pair are part of the consolidation and they expected the euro to trade sideways, in a wide range of 1.0780-1.0870. However this did not happen. The euro closed Tuesday, January 17, near 1.0816, having lost 0.11%. On Wednesday morning, January 18, the EUR/USD was trading at 1.0814, gradually gaining ground.

Will the dollar provide surprises? First steps to growth

According to observations of currency strategists of Danske Bank, this month the pair reached the highest levels for the last six months. In the near term, analysts expect this trend to continue, but emphasize that there is too much positive in the euro. In addition, Danske Bank believes that market participants underestimate the Fed's potential to hike rates.

According to Danske Bank forecasts, in the first quarter of 2023, the Fed will again raise rates by 5% or more. As for the other major central bank, namely the European Central Bank, the markets are estimating an additional 150 bps hike in eurozone rates. At the same time, the bank admits that the ECB is capable of more, so further strengthening of the monetary policy should be expected. Against this background, another tightening of financial conditions is likely, Danske Bank emphasizes. The strengthening of the current trend will be a negative factor for the EUR/USD pair in the short term (from 3 to 6 months).

According to experts, the overvaluation of the EUR/USD pair will remain on the horizon from 1 to 3 years, while the risks will be shifted to the downside. However, the acceleration of global economic growth can radically change the current situation. Against this background, experts are afraid to improve their forecasts for the EUR/USD pair and expect it to fall to 1.0300 over the next 12 months.

*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade
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