The US dollar index (DXY) continues to consolidate near 96 points, maintaining its position at the level of the annual maximum. Market participants are trying to figure out if they should bet on the further recovery of the dollar?
It is worth noting that this question was more than appropriate some time ago, however, after the speech of FRS Chairman Jerome Powell, the market was given an unambiguous signal that the dollar has good chances to strengthen its own positions.
The head of the American regulator, speaking on Tuesday before the US Senate Banking Committee, said that the central bank seriously admits the possibility of accelerating the pace of economic stimulus reduction amid growing inflationary risks.
In particular, Powell noted that he no longer considers high inflation as temporary and that he may reconsider the timing of the complete rollback of the national quantitative easing program at the next meeting on monetary policy, which will be held on December 14-15. This rhetoric also brought back speculation to the market about faster-than-expected.
Recall that earlier the Fed has already taken the first step towards tightening monetary policy, announcing at the end of the November meeting about plans to reduce the volume of the asset purchase program by $15 billion. Prior to that, the monthly volume of bond buybacks was 120 billion.
Market participants now believe the Fed is ready to go even further and announce an additional $30 billion cut in the program in December. If expectations are met, the bond buyback program will be phased out in March 2022, bringing the first rate hike in many years.
Thus, the prospect of further tightening of US monetary policy may well become the main catalyst for the dollar's growth over the next six months.
There is also a demand for defensive assets on the side of buyers of the US dollar. Investors continue to assess the risks associated with the new coronavirus strain. Drug manufacturers are concerned that existing vaccines may be less effective against omicron.
Make money from the Omicron Covid variant by trading currencies
Lack of specific information causes uncertainty and volatility in financial markets. The CEO of Moderna, in an interview with the Financial Times, said he doubted existing vaccines would be as effective against the new omicron covid variant as against the old ones.
In the event that the worst fears are confirmed and the new strain proves to be resistant to vaccines, panic in financial markets will lead to a collapse of all risky assets, with defensive instruments such as gold, bonds, and the US dollar becoming the main beneficiaries.
Considering the above, the DXY growth can resume at any moment, and the target of the upward movement will be the psychological threshold of 100 points.
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