After strengthening on Thursday, the dollar and its DXY index have moved lower again on Friday. DXY futures were trading near 101.51, rebounding from Thursday and a 10-month low of 100.68. The DXY was steadily moving towards the psychologically significant 100.00 mark, and so far the downtrend has prevailed.
The same cannot be said for the U.S. stock market. Investor optimism prevails here, and on Thursday, the S&P 500, NASDAQ 100, and Dow Jones Industrial Average (DJIA) hit another 23-week high, steadily strengthening since the beginning of this year.
Buyers of U.S. stocks are counting on a further slowdown in the Federal Reserve's monetary tightening and on the fact that it will soon take a pause and then move on to a pivot - monetary easing. Though, judging by their statements, further rate hikes will be needed. At the same time, Fed Chairman Jerome Powell acknowledged at a press conference following the release of the interest rate decision that the US "economy slowed significantly last year," "consumer spending looks weak," and "housing activity continues to weaken."
An extremely volatile trading week has come to an end. Three key global central banks (USA, UK, eurozone) held their meetings devoted to monetary policy, and all three banks have raised their interest rates by 0.25%, 0.50%, 0.50% respectively. According to the results of the meetings, the heads of all three central banks spoke in favor of further tightening of the monetary policy. Their statements were generally that the tight labor market and higher-than-expected domestic price and wage pressures point to more sustainable inflation, and inflation risks are significantly skewed upward. But even though the European Central Bank and Bank of England made tougher decisions than the Fed last week, raising interest rates by 0.50%, the euro and pound could not benefit much from this in their competition with the dollar.
Some time after the conclusion of the BoE and ECB meetings, EUR/USD and GBP/USD fell sharply, with the pound doing the most here, which fell in the major cross pairs as well. The BoE understands that the very weak supply side of the economy is at the heart of it all. Most economists agree with it: the situation in the British economy does not inspire much optimism. Economists predict an inevitable economic downturn and recession for Great Britain. In this regard, they believe that the BoE will soften its policy next year, if not sooner, to support the economy, despite the high inflation.
On Friday, the pound and the GBP/USD pair were trying to build an uptrend. The pair was trading near 1.2256. Above the key support levels of 1.2140, 1.2230, staying in the area of the bull market in the medium-term. Since late September, when the BoE unexpectedly intervened in the government bond market trading, GBP/USD has been developing a bullish correction, also taking advantage of the dollar weakness. Nevertheless, in order to enter the area of the bull market in the long-term, it needs to climb above the long-term resistance levels of 1.2730, 1.2900.
The BoE raised the interest rate by another 50 bps to 4%, the highest level since October 2008. However, the Bank predicts that annual U.K. inflation will fall from the current 10.5% to about 4% by the end of the year. This fuels rumors that the BoE's current rate hike cycle is nearing its end, which in turn is negative for the pound.
