Dollar under pressure as peace talks curtail safe-haven demand

upamfva · 06-04-2022 05:34:46

The USD weakened on Tuesday, with the dollar index falling to 98, from almost 99.5 the day before. Reports that diplomatic negotiations between Russia and Ukraine are progressing have put pressure on the currency. The dollar is considered a safe-haven asset and, in case the crisis in Ukraine de-escalates, it may fall even further.To get more news about ingot brokers, you can visit wikifx.com official website.

In the past week, the dollar had gained strength, boosted by hawkish Fed rhetoric. In a recent speech, Fed Chair Jerome Powell hinted that the Fed may perform a steeper rate hike in the future, going above the expected 25 base points. Other Fed members have similarly shown signs of encouraging a more hawkish fiscal policy, increasing the odds of a 50 bp rate hike at the Central Bank’s next meeting in May. Markets are anticipating total rate hikes of 175 base points within the year to tackle soaring inflation rates.

US treasury yields are climbing as rate hike odds rise, providing support for the dollar. The 10-year Treasury yields rose to a two-year high of 2.5% early on Tuesday, as investors anticipate a more aggressively hawkish Fed policy, but retreated later in the day amid rising expectations of a resolution of the crisis in Ukraine.

The JOLTS Job Openings and CB Consumer Confidence data, which are economic and employment indicators for the dollar, were released on Tuesday and were overall positive for the US economy, supporting the dollar.

The dollar had dropped in the wake of the Federal Reserve's latest policy meeting in March, in which the Federal Reserve raised its benchmark interest rate by 25 base points, bringing its interest rate to 0.50%. The US Central bank is attempting to bring down inflation that has been rising at the fastest rate in 40 years. The 25-base point rate hike though was considered conservative and had already been priced in by markets. Recent statements by FOMC members though show a shift towards a more aggressively hawkish policy.

ADP Non-Farm Employment and Quarterly Final GDP data are scheduled to be released on Wednesday for the dollar and may cause some volatility in the currency. In addition, FOMC Member George is due to deliver a speech, which may affect the currency, as Fed rhetoric in the past few days was one of the main factors that have been driving the dollar up.
The EUR/USD rate skyrocketed to 1.13 on Tuesday, from the 1.100 level, as peace talks sparked hopes of a resolution of the crisis in Ukraine. The safe-haven dollar retreated, while the Euro regained some of its lost ground. If the currency pair goes up, it may encounter resistance at 1.139 and further up at 1.148, while if it declines, support may be found at the 1.080 level.

Inflation data this week are expected to show price pressures continuing to rise in the Eurozone, with German headline inflation rising to 6.1% from 5.1% in February. ECB President Christine Lagarde stated last week that inflation is expected to rise in the Eurozone, but will drop again in the long run. Lagarde has also stressed that the ECB needs to remain flexible and may alter its monetary policy in response to unforeseen inflationary pressures arising from the war in Ukraine, but stated that the EU Central Bank is in no hurry to raise its interest rate.

The ECB has been pursuing a more cautious fiscal policy than other major Central Banks, although it has recently turned towards a more hawkish direction. The ECB has announced its decision to wind down its bond-purchasing program sooner than expected, placing the end of the bond-buying program in the third quarter of 2022, if financial conditions in the Eurozone allow it. The ECB is trying to avert a dangerous economic effect known as stagflation, the mix of economic stagnation and high inflation rates.

In addition, the European Central Bank has announced that it does not plan to raise its benchmark interest rate before the end of its bond-buying program in the third quarter of 2022. Many market analysts predict that the ECB will raise its interest rate by at least 30 base points in Q4 of 2022 and some predict a steeper rate hike of 50 bps, although so far, the ECB has been reluctant to move towards a rate hike. As the Fed and the BOE have already raised their benchmark interest rates, the Euro remains at a disadvantage from the difference in interest rates.

On Wednesday, Monthly German Preliminary CPI and Spanish Flash CPI data will be released, which are indicators of inflation for two of the Eurozone’s leading economies. More importantly, ECB President Lagarde is due to deliver a speech at an event hosted by the Bank of Cyprus. Her statements will be scrutinized by investors and may cause some volatility in the currency, as the direction of the ECB’s fiscal policy is expected to affect the Euro considerably in the coming weeks.