The United States central bank, the Federal Reserve, on Thursday (March 23/) raised interest rates by 25 bps. That was from 4.75 percent to 5 percent.
Although the rate hike this time was in line with expectations, the shift in the market outlook related to interest rates made the US Dollar depressed. It can be seen clearly from the progress.
The DXY index, which measures the strength of USD against major currencies, sank by 0.22 percent and traded at 102.30. The weakening of the US dollar became a bullish momentum for major currencies.
It is especially the Euro which posted an increase of 1.3% against the dollar. The pair jumped to touch a range above 1.0912 last night in the market.
Powell: Rate Hike One More Time, No Intention of Cutting Interest
The strengthening of the Euro occurred because the prospect of an ECB rate hike of 50 bps is still wide open. Meanwhile, the Fed has certainly only hiked one more time.
This condition makes the attractiveness of the dollar even dimmer. In a press conference after the rate announcement, Fed Chairman Jerome Powell said he expects one more rate hike.
Besides that, he also has no intention of cutting rates this year. Thus, the US central bank's peak interest rate is likely to be reached at its upcoming May meeting.
Members of the monetary policymaker (FOMC) don't see the possibility of a rate cut this year. That is not their baseline expectation, As Powell said.
High Inflation is Also Caused by the Solid Labor Market
The solid United States labor market is one of the main factors behind the still high inflation rate. However, recent shocks in the banking sector have given rise to the narrative that high interest rates are starting to damage the economy.
This is what triggers uncertainty regarding the direction of the Fed's monetary policy going forward. The United States banking system is healthy and resilient.
Besides that, the current pprogresses of the SVB crisis are in tighter credit conditions. That is especially for households and businesses weighing at the same time.
It is especially on the economic activity, labor hiring, as well as inflation. Furthermore, Powell tried to reassure the market about the US banking system.
The Crisis isn’t the Basis of Wider Weakening in Banking Sector
Powell reassured the market about banking system in America by saying that it was Silicon Valley Bank (SVB) management that made a fatal mistake. It was as people can see lately.
He said the collapse of a number of banks could not be used as a basis to show a wider weakening of the banking sector. Several analysts also voiced their opinions in light of the Fed's latest statement.
One of them is Brian Jacobsen of Allspring Global Investments. He stated that the Fed is now living with hope and prayer that they don't make mistakes in the future.
It is especially for any matters that the banking system can't fix. Elsewhere, another need is brought by tge EUR/USD pair and it’s changes in the forex market.
EUR/USD Remains at a High Level
From a technical perspective, EUR/USD remains at a 6-week high with a key 1.0800 to rise further. It provided strong resistance in February as EUR/USD tried to break higher. The weakest resistance path at the moment seems to be indeed on the upside.
Given the hawkish rhetoric from ECB President Christine Lagarde and last week's 50 bps hike which signals the ECB's hawkish stance, a 25 bps hike from the Federal Reserve may provide temporary relief.
It is especially for the US Dollar today. However, if people get economic projections and dovish prospects from the Fed Chairman, they could break higher focusing on the psychological levels of 1.0920 and then 1.1000.
