24.11.2022 08:37 AM
Fed considers decelerating rate hike pace. Will US dollar slow down?

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The European currency managed to outperform the US dollar by the end of the week. Following the release of the FOMC meeting minutes, USD significantly declined. Meanwhile, the euro managed to get a head start and use the situation to consolidate its positions.

On Thursday, November 24, the US dollar fell considerably against other major currencies, especially against the euro. The decline was caused by increased risk appetite in the markets, which followed the release of the FOMC meeting minutes for November. In this situation, the euro rallied strongly, trying to recoup its earlier losses. Early on Thursday, EUR/USD was trading near 1.0435, advancing from its previous level of 1.0395.

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On Wednesday, November 23, the Fed published the minutes of its November policy meeting, which indicated that the regulator plans to slow down the pace of interest rate hikes in the near future. This year, the Fed increased its benchmark rate six times. Most analysts (76%) expect the Fed to raise its interest rate again in December to a target range of 4.25%-4.5% from the current 3.75%-4%. This rate hike is expected to be smaller than the previous ones.

As a result, the US currency has lost some of its gains. Disappointing macroeconomic data from the US also contributed to the drop of USD. The US dollar has come under strong bearish pressure after these reports. According to November data, the S&P Global Services PMI in the declined stronger than expected. At the same time business activity in the US service sector fell at an accelerated pace, with the S&P Global Services PMI dropping to 46.1 from 47.8 a month ago. The drop was attributed to weakening consumer demand and decreased volume of new orders, which hit the lowest level since May 2020.

Furthermore, the S&P Global Manufacturing PMI slid down below 50 points in November. Analysts recorded a significant drop in business activity in the US manufacturing sector, with the S&P Global Manufacturing PMI dropping to 47.6 points from the previous 50.4 points. Falling output in the US exacerbated the decline. "In this environment, inflationary pressures should continue to cool in the months ahead, potentially markedly, but the economy meanwhile continues to head deeper into a likely recession," Chris Williamson, lead economist at S&P Global Market Intelligence said.

Fed policymakers are concerned about the weaker US labor market. The regulator considers the situation in the US labor market to be a key policy gauge, along with inflation, and uses it when deciding on its monetary policy. A decline in the US labor market is a signal to the Fed that it is time to reduce the pace of rate hikes. Over the past week, the number of jobless claims in the US increased to 240,000. This trend has persisted since the end of September 2022, analysts say.

The number of initial claims in the US hit the highest level since August 2022, well above the 225,000 claims forecasted earlier. At the same time the number of continuing claims rose to the highest point since March 2022 and stood at 1,551,000.

Analysts have noted that the US labor market has begun to reverse, which would give strong support to EUR/USD. Such a situation is favorable for the stock market, but detrimental for the US dollar, as it implies the Fed would soften its hawkish stance.

In the current situation the US dollar, which briefly retreated, took a pause, just like the Fed, which plans to reduce the pace of rate hikes. Analysts believe that USD will gather its strength and test its highs again in the near future. The US currency is likely to be successful in this scenario.

Larisa Kolesnikova,
Analytical expert of InstaForex
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