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Fed Anticipates Tightening Policy: US Dollar Gains Strength

Published by
Nonhlanhla P Dube
  • The US Dollar is trading higher for the fourth straight day and is on track to test its previous highs, due to the unexpected rate hike by the Reserve Bank of Australia, which highlighted the difficulty of getting high inflation back to target.
  • Major central banks are unlikely to ease monetary policy anytime soon, and the markets are underestimating the Federal Reserve’s capacity to tighten policy and keep it there for an extended period.
  • The Fed is expected to leave the door wide open to further hikes and may update its forecasts and Dot Plots at the June meeting, with 25% odds of another hike on June 14. The market is still pricing in a cut by year-end, which the article views as highly unlikely.

According to a recent analysis by Brown Brothers Harriman (BBH) economists, the US dollar continues to remain firm with its fourth consecutive day of trading higher. The currency is currently trading near 102.294, marking its highest level since April 11. The currency is expected to test the April 10 high near 102.807, and if it breaks above that level, it could set up a test of the April 3 high near 103.058.

The BBH economists note that the Reserve Bank of Australia (RBA) has sent a clear message that should be taken seriously by global markets. The RBA unexpectedly hiked interest rates, which underscores the difficulty of getting stubbornly high inflation back to target levels. This move indicates that interest rates around the world are likely to remain higher for a longer period, and any expectations of quick monetary policy pivots are misguided. The economists at BBH believe that any easing by major central banks is unlikely before 2024.

South Africa is a part of the global economic landscape and is affected by economic developments in other parts of the world. The Reserve Bank of South Africa has expressed concern about inflation, and this latest move by the RBA highlights the challenges faced by central banks worldwide in addressing inflationary pressures. Therefore, it is essential for South African policymakers and investors to monitor global economic trends closely and their potential impacts on the local economy.

The experts at BBH caution investors against complacency regarding a potential Federal Reserve pivot. They believe that the central bank is unlikely to ease its current monetary policy stance any time soon, and the markets are underestimating its ability to tighten policy and keep it there for an extended period. The Fed’s ability to tighten policy should be a wake-up call for investors who have become too complacent about potential policy changes.

In his recent statement, Chair Powell acknowledged that the Fed considered a pause but added that it was too soon to say how Fed policy has been impacted by the banking crisis. The BBH economists believe that this statement still holds true, and the Fed is likely to leave the door wide open to further hikes. They also note that updated forecasts and Dot Plots will come at the June meeting, which they believe is more in play than the markets anticipate. Despite WIRP now suggesting 25% odds of another hike on June 14, the market still prices in a cut by year-end, which the BBH economists view as highly unlikely.

In conclusion, the US dollar remains firm, and the RBA’s recent interest rate hike underscores the challenges faced by central banks worldwide in addressing inflationary pressures. South Africa is not immune to these economic challenges, and it is crucial to monitor global economic trends closely. The BBH economists warn against complacency in light of the Federal Reserve’s potential policy changes, and investors should prepare for potential policy tightening and avoid relying on quick monetary policy pivots.

Nonhlanhla P Dube

Nonhlanhla P Dube is a senior news reporter at Rateweb. Nonhlanhla is a student of International Relations at the University of South Africa. She reports primarily on personal finance and economics. You can contact her directly by email at nonhlanhla@rateweb.co.za

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Published by
Nonhlanhla P Dube
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