The three whales of the uptrend in the USD index were American exceptionalism, as well as aggressive increases in the federal funds rate and strong demand for the dollar as a haven currency. The U.S. economy looked more resilient than others.
The Fed was running ahead of the rest of the central banks like the leader of the pack on the road of monetary tightening, and numerous turmoil in the global economy and politics forced investors to hide in havens. Things turned upside down in November. So should we be surprised at the reversal of the EURUSD trend?
When the Federal Reserve began the monetary restriction process in March, the federal funds rate ceiling was estimated by the futures market at 2.8%. The September FOMC forecast raised it to 4.6% and Jerome Powell’s words that the actual peak would be even higher, to 5%. Before the release of the U.S. inflation data for October, there were even rumors circulating in the market of 6%, but the slowdown in consumer prices has forced investors to lower the bar. As a result, the cost of borrowing may not reach 5%.
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Inflation in the Eurozone
At the same time, inflation in the eurozone has not yet reached its peak, causing the market to hold high expectations for the ECB deposit rate.
The difference between the expected extreme rates in the U.S. and the eurozone is narrowing, which plays into the hands of the EURUSD bulls.
The more aggressively the Fed and other central banks tightened monetary policy, the greater the risk that the world economy would plunge into recession.
Regulators prioritized beating inflation and were often willing to sacrifice economic growth.
Over time, their stance changed. First, the Reserve Bank of Australia and the Bank of Canada slowed the pace of monetary retrenchment; then the Fed and the Bank of England hinted at it. Even an ECB hawk-like Robert Holzmann pointed out that the Governing Council should be mindful of acting too harshly, which could push the eurozone into stagflation or recession.
As a result, the idea of a soft landing of the U.S. economy has been resuscitated, suggesting a growing chance that it will avoid a recession after all. In such an environment, demand for safe-haven assets declines and the USD index falls.
Finally, warm weather, rising gas inventory levels to 95% instead of the usual 80-85%, and falling blue fuel prices have given rise to speculation that the Eurozone economy is not so bad compared to the US. It is also capable of avoiding a recession.
