King Dollar Feeds Off Aggressive Fed

Fundamental analysis of Forex market

King dollar’s scorched-earth ascent to a fresh 20-year peak has clobbered broad swathes of global financial markets, with dollar-denominated assets clearly bearing the brunt. Spot gold has returned into sub-$1700 domain, Brent futures have tumbled to their lowest since February, while bitcoin is on the cusp of erasing almost all of its summer gains.

The greenback has clearly fed off the palpable anguish surrounding a Fed that’s now persistently ultra- aggressive in its battle against multi-decade high inflation. The risk aversion that’s coursing through markets also suggests that global stocks could move much further to the downside over the immediate term, with the FOMC apparently still far from reaching peak hawkishness.

Such angst has also left the buck’s major peers flailing in the greenback’s wake. The pound is hurtling towards its lowest levels since the onset of the pandemic, the yen is trading around levels not seen since 1998, while the euro is extending its path south of parity.
Hawkish ECB to offer little solace for euro

Even ultra-hawkish rhetoric emanating out of the ECB tomorrow isn’t likely to be much of a saving grace for the beleaguered euro. Despite the 65% chance currently priced for a 75bp hike by the ECB on Thursday, markets may see beyond such a supersized move as just front-loading of its intended rate hikes. The ECB’s policy tightening plans may ultimately be curtailed by the depressing outlook for the Eurozone.

Should the ECB instead surprise markets with a relatively dovish 50bp hike tomorrow, that might even open the floor below 0.98 for EURUSD.

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