The past week brought with it a further depreciation of the dollar. The US currency has been the weakest of the G8 currencies over the past few days. However, Danske Bank economists believe that the Fed will not be able to justify the policy change at this stage, so the current optimism in the financial markets is not justified.
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Markets expect a less aggressive stance from the Fed
Although there are very strong expectations for the fourth consecutive increase in the federal funds rate by 75 basis points to 4.00%. During next week’s FOMC meeting, Danske Bank notes that there is heightened speculation in the market that the Fed will signal that further rate hikes may be calmer, and that the tightening cycle will end in early 2023. In response, stocks rose and the dollar backed off its 20-year highs, which pushed the eurodollar back to parity.
The worst is yet to come
However, Danske Bank believes that this optimism is misplaced. – We see no macro- or financial arguments in favor of a break (in the Fed’s monetary tightening). We do not see today as the day when we should position ourselves in the direction of the Fed pivot (i.e. changes in the attitude of the US central bank to further moves in interest rates – ed.) – Danske Bank economists indicate, adding that the worst is still ahead of us.
High inflation will stay with us for longer
Economists are very anxious about inflationary trends. “Noticeably, the latest macroeconomic data points indicate that inflation is largely still alive,” they admitted, recalling that retail sales were solid, suggesting that nominal spending remains high, while inflation expectations tended to rise. As if that was not enough, the last two inflation releases were also above expectations. The key element will be whether the forward looking analysis suggests that inflationary pressures are at their peak. According to Danske, however, there is a significant risk that inflation could be a much longer problem.
– We may need 1-2 years of tightened or even tighter policy than the one we are seeing today – experts forecast.
The euro will drop to $ 0.95
This also means that, in their opinion, the euro exchange rate will fall to the region of USD 0.95 at the end of this year, which would be the lowest level since June 2002.
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