empty
27.03.2023 04:30 PM
The dollar is not allowed to sink

What will happen to the U.S. dollar? It depends on when! The BofA predicts that the USD index will decline in the medium to long term, as it is overvalued. However, in the short-term investment horizon, interest in the U.S. currency may return as the banking crisis recedes into the shadows and the market's attention shifts to an old problem—inflation. However, while the mass media headlines are full of messages about the problems of credit institutions and ways to solve them, the U.S. dollar remains under pressure.

With the aim of preventing a fourth bankruptcy in the system, this time from First Republic Bank, the Fed and the Treasury are considering expanding the emergency lending program. This will help the troubled institution cope with the lack of liquidity. On paper, this means another expansion of the Fed's balance sheet, which cannot but please the EURUSD bulls. They took on board the factor of a potential dovish reversal—according to the derivatives market, the federal funds rate will fall by as much as 100 bps in 2023.

Dynamics of the proposed federal funds rate cut

This image is no longer relevant

Essentially, the Fed is engaged in monetary expansion by expanding its balance sheet, and derivatives are waiting for it to continue its banquet in the form of a serious easing of monetary policy. In theory, this is favorable for risky assets and a clear negative for the U.S. dollar. Nevertheless, stock indices are in no hurry to rise, just as the USD is in no hurry to fall. So what is the reason?

Expectations of a recession are to blame. The bond yield curve has been signaling it for some time. In March, FOMC officials' speeches began to synchronize with its readings. For example, Minneapolis Fed President Neel Kashkari said that a banking crisis could trigger a recession in the U.S. economy. As a result, expectations of a federal funds rate cut are perceived as the first sign of recession, which keeps the S&P 500 up and the USD index afloat.

U.S. yield curve dynamics

This image is no longer relevant

Meanwhile, good news keeps coming from Europe. Following the growth of business activity in the currency bloc to a 10-month high, IFO business climate index in Germany pleased. The index has risen since March from 88.4 to 91.2 with a slight decrease forecast. Curiously, none of the Bloomberg experts predicted such a high value of the indicator.

This image is no longer relevant

However, not everything is as rosy in the euro area as it might seem at first sight. Because of strikes in France, gas prices began to rise again, and the panic around Credit Suisse and Deutsche Bank is contagious. The share of bank lending in Europe is much higher than in the U.S., where loans are mainly made through the bond market.

Technically, the failure of the EURUSD bears to storm the 1.0715 pivot point and rebound from the upper boundary of the 1.055–1.0735 fair value range is good news for buyers. A break of the resistance at 1.08 and 1.083 will allow to build up previously formed longs.

Marek Petkovich,
Analytical expert of InstaForex
© 2007-2025
Select timeframe
5
min
15
min
30
min
1
hour
4
hours
1
day
1
week
Earn on cryptocurrency rate changes with InstaForex
Download MetaTrader 4 and open your first trade
  • Grand Choice
    Contest by
    InstaForex
    InstaForex always strives to help you
    fulfill your biggest dreams.
    JOIN CONTEST

Recommended Stories

GBP/JPY. Analysis and Forecast

Following the release of UK consumer inflation data, which came in above expectations, the GBP/JPY pair slightly pared back its intraday losses. However, it failed to attract significant buying interest

Irina Yanina 11:25 2025-05-21 UTC+2

Will Global Central Banks Continue to Cut Interest Rates? (Bitcoin May Resume Growth and USD/JPY May Decline)

Among the economically developed nations—those that belong to the Western wing of the global economy—there is an important rule: a target of 2% inflation, specifically consumer inflation. Achieving this target

Pati Gani 09:46 2025-05-21 UTC+2

Market: Do or Die!

Markets can remain irrational longer than you can remain solvent. The S&P 500 rally from the April lows—adding $8.6 trillion in market cap—often appeared irrational. Investors ignored the Federal Reserve's

Marek Petkovich 08:23 2025-05-21 UTC+2

GBP/USD Overview – May 21: The Rollercoaster Continues

On Tuesday, the GBP/USD currency pair declined, unlike on Monday. While the euro's movement required searching for reasons behind the dollar's drop, the technical picture for the pound is straightforward

Paolo Greco 07:46 2025-05-21 UTC+2

EUR/USD Overview – May 21: The Theater of Chaos and Absurdity Continues

The EUR/USD currency pair moved sluggishly on Tuesday, which was not surprising given the absence of news. Monday didn't bring much in the way of important news either

Paolo Greco 07:46 2025-05-21 UTC+2

What to Pay Attention to on May 21? A Breakdown of Fundamental Events for Beginners

Very few macroeconomic events are scheduled for Wednesday. However, the UK inflation report holds significant importance for the market, or rather, used to . As we can see, traders continue

Paolo Greco 06:45 2025-05-21 UTC+2

The Fed Maintains a Wait-and-See Approach

The market expects active measures from the U.S. central bank, while Donald Trump keeps demanding that Jerome Powell cut interest rates. It's worth noting that Powell cannot make such decisions

Chin Zhao 00:41 2025-05-21 UTC+2

The Dollar Regains Its Spirit

As the CFTC report showed, investors are still not very impressed that the US and China have managed to reduce trade tensions and take a pause for negotiations

Kuvat Raharjo 00:26 2025-05-21 UTC+2

EUR/USD: Weak Dollar Meets Indecisive Euro

The EUR/USD pair has consolidated above the 1.1200 level, reflecting the overall weakening of the U.S. dollar. The "bearish attack" we witnessed last week ended in failure. EUR/USD sellers were

Irina Manzenko 19:35 2025-05-20 UTC+2

Euro Exhausts Bullish Momentum

Inflation in the eurozone remained unchanged in April compared to March, fully in line with forecasts—2.2% year-over-year for the headline index, and 2.7% year-over-year for the core index. This inflation

Kuvat Raharjo 19:16 2025-05-20 UTC+2
Can't speak right now?
Ask your question in the chat.
Widget callback
 

Dear visitor,

Your IP address shows that you are currently located in the USA. If you are a resident of the United States, you are prohibited from using the services of InstaFintech Group including online trading, online transfers, deposit/withdrawal of funds, etc.

If you think you are seeing this message by mistake and your location is not the US, kindly proceed to the website. Otherwise, you must leave the website in order to comply with government restrictions.

Why does your IP address show your location as the USA?

  • - you are using a VPN provided by a hosting company based in the United States;
  • - your IP does not have proper WHOIS records;
  • - an error occurred in the WHOIS geolocation database.

Please confirm whether you are a US resident or not by clicking the relevant button below. If you choose the wrong option, being a US resident, you will not be able to open an account with InstaForex anyway.

We are sorry for any inconvenience caused by this message.