Analisis Forex & Kajian: 25.04.2023 - Dollar: Brief Summary and...

25.04.2023 12:23 PM

Dollar: Brief Summary and Near-Term Prospects

The growth attempts made by the dollar last week took a significant hit on Monday. The dollar index (DXY), which had strengthened during yesterday's Asian trading session, sharply fell again by the end of the trading day, testing the 101.00 mark.

During today's Asian trading session, DXY again declined, updating the local low from April 17 at 100.93. It is likely that the 100.00 psychological mark will also be broken soon, and the dollar index will head towards the 2020 lows located near the 89.00 mark.

Fed May meeting is fast approaching

As indicated in the minutes of the March meeting, some leaders of the American Central Bank believe that it is necessary to pause the monetary policy tightening cycle due to the risks of increased pressure on the banking sector and the economy as a whole, which will ultimately lead to at least a recession. Although a large-scale crisis or economic collapse is not yet being discussed, a recession is dangerous because it can turn into stagnation, threatening mass layoffs and a reduction in the population's living standards, which could ultimately lead to global political changes, including changes in state structure, as we noted in one of our previous reviews.

Market participants assess the macroeconomic statistics coming from the United States, trying to predict both the likelihood of a recession in the American economy and the Federal Reserve's actions under current conditions. Most economists believe that the leaders of the American Central Bank will raise the interest rate by 25 basis points at the meeting on May 2 and 3, then pause the increases to switch to a monetary policy easing by the end of the year.

The U.S. government also faces the problem of an enormous national debt (over $31 trillion), and if measures to raise or cancel the debt ceiling are not taken, the government will not be able to fulfill its financial obligations this summer, which would mean a default of the American economy, according to a recent report from the Congressional Budget Office.

Moreover, to at least partially cover the U.S. budget deficit (which will amount to an estimated $1.4 trillion this year, according to economists), it is not excluded that the Federal Reserve will increase the printing press's capacity, which in turn will accelerate inflation, already exceeding the Fed's target level of 2% by multiple times, and depreciate the dollar.

Thus, the Federal Reserve once again faces a difficult task – to reduce inflation without harming the economy.

This week, market participants will have the opportunity to reassess the prospects of the American economy, the Federal Reserve's monetary policy, and the dollar: on Wednesday (at 12:30 GMT), fresh data on durable goods orders will be published, implying significant investments in their production (an increase in indicators is expected), and on Thursday (also at 12:30 GMT) – preliminary data on GDP and the PCE price index (the main inflation indicator used by Fed officials as the primary inflation gauge) for Q1 2023. Economists predict a slowdown from 2.6% to 2.0% (in annual terms) in the American economy in the first quarter and an acceleration of the PCE price index growth to +4.8% from 4.4% in the previous quarter.

It is difficult to say how the market will react to this data in light of the upcoming Federal Reserve meeting, but it is certain that the reaction can be quite volatile, especially if the data significantly differ from the forecast.

As for today's news, it is worth paying attention to the publication of the U.S. housing price indices at 13:00 and the Conference Board report with consumer confidence data at 14:00 (GMT), demonstrating the degree of confidence American consumers have in the country's economic development and the stability of their economic situation. The previous indicator value was 104.2. An increase in the indicator will positively affect the USD, while a decrease in the value will weaken the dollar.

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