07.04.202208:26 Forex Analysis & Reviews: Fed's hawkish stance to boost USD

Many analysts strongly believe that the Fed's hawkish stance on monetary policy may facilitate a dazzling rally of the US dollar. Notably, the watchdog tends to neglect negative outlooks for the greenback. At the same, it does everything possible to ensure its steady growth.

Many analysts strongly believe that the Fed's hawkish stance on monetary policy may facilitate a dazzling rally of the US dollar. Notably, the watchdog tends to neglect negative outlooks for the greenback. At the same, it does everything possible to ensure its steady growth.

However, the US dollar is likely to maintain bullish momentum as long as the regulator aggressively hikes the interest rate. It is confirmed by a poll conducted by Reuters. According to its results, the US currency will retain its leading position as long as the Fed sticks to a hawkish stance on monetary policy, namely hiking the key rate by 50 basis points. Besides, the central bank could shrink its near $9 trillion balance sheet as it looks to cool inflation. It is also positive for the US dollar.

It has been steadily rising for some time amid the Fed's hawkish rhetoric. Its recent increase was bolstered by the speech of Fed policymaker Lael Brainard. "The [FOMC] will continue tightening monetary policy methodically through a series of interest rate increases and by starting to reduce the balance sheet at a rapid pace as soon as our May meeting," she said. It appears that the regulator will continue to hike rates and reduce the balance sheet in 2022. If this scenario comes true, the US dollar is sure to benefit from it. Demand for the greenback will inevitably trigger a rally in the bond market.

Rising inflation makes the Fed and the US Treasury more patient with the US dollar's rally. At the same time, the current monetary policy fuels the rise of the national currency. Besides, a strong US dollar limits the growth of import prices.

The FOMC meeting minutes also confirmed a shirt to an aggressive monetary policy. The Fed signaled it could raise the interest rate by 50 basis points. The regulator also decided to cut about $95 billion a month from its holdings, split between $60 billion of Treasuries and $35 billion of MBS. The euro is weaker against the US dollar due to the hawkish rhetoric of the Fed. As a result, the euro is losing steam although it performs rebounds from time to time. Against this background, on April 7, the EUR/USD pair was trading at 1.0915, desperately trying to consolidate at this level.

What is more, the euro is unable to recover due to geopolitical tensions. According to analysts at Commerzbank, the protracted geopolitical confrontation is bearish for the euro. At the same time, inflationary pressure and economic risks are growing exponentially in the EU due to rising energy prices. The pressure on the ECB is increasing as the position of the ECB on monetary policy is unclear. It is rather discouraging as the Fed has already made steps to tighten monetary policy.

Decisive and timely measures of the Fed contrast significantly with the ECB's indecision. Analysts reckon that the eurozone will bear the brunt of the negative consequences of the Russia-Ukraine conflict compared to other states. Economic risks for the eurozone will intensify in the near future. To this end, the euro is not a rival to the US dollar, Commerzbank points out

The US currency also took advantage of growing US Treasuries and upbeat macroeconomic reports. The 10-year government bond yield increased to 2.554% from the previous reading of 2.409%. The US ISM Services PMI index advanced to 58.3 in March, logging the highest level since mid-2021.

Therefore, economists voice opinions about the formation of a new financial order. Its main features will be higher inflation and a key rate compared to the period from 2008 to 2020. US stocks may greatly benefit from such a situation. They are more resilient to high energy prices than the European ones. In addition, Eurobonds are more vulnerable to the negative economic impact of the Russia-Ukraine conflict. Thus, The US dollar is likely to maintain a rally in the medium and long term amid the current trends and changes in monetary policy.