Dollar exchange rates may recover in the coming days as some analysts say the Fed's fight against inflation will not be derailed by the recent failure of a number of smaller US banks.
The US dollar fell as markets faltered in expectations about the scope of future interest rate hikes by the Federal Reserve and with growing concerns about the stability of the US banking system. Pressure on the dollar allowed the GBP/USD pair to rebound upwards towards the 1.2205 resistance level, before settling around 1.2155 at the time of writing, waiting for anything new.
But these risks may be contained by the measures announced by the authorities in the United States and around the world, which may be wrong for those who bet on further declines in the dollar. “Tactically, I think these are near-term buy signals for the US dollar,” says Stephen Gallo, forex analyst at BMO Capital Markets.
As can be seen, the price of the US dollar fell sharply late last week on the news of the failure of Silicon Valley Bank (SVB) as it became the latest financial institution to recede under the weight of rising US interest rates. The yield on two-year US bonds has collapsed along with investor expectations for more Fed rate hikes as investors bet that the Fed will have to show restraint in raising interest rates to avoid creating a new financial crisis.
Accordingly, the exchange rate of the pound against the dollar rose again above 1.21, after it was at its lowest level at 1.18 just last week.
However, analysts at TD Securities are "concerned" that the market "may have overdone its hand." The bank's economists expect core CPI inflation in the US to come in above expectations at 0.5% on a monthly basis, a timely reminder that the Fed still has an inflation "problem." TD Securities expects the Fed to raise the final interest rate to 5.75%, "which would prevent an extension of US dollar weakness."
The developments will cap the GBP/USD exchange rate as USD selling linked to expectations that the Fed will pull the handbrake on rate hikes will be called into question.
The dollar was rallying last week after Federal Reserve Chairman Jerome Powell told Congress that interest rates in the US may have to go higher than previously expected. This has increased markets' bets for a 50 basis point increase in the FOMC meeting next week. However, investors are betting that the Fed's commitment to lower inflation will be shaken by fears that it is destabilizing the financial system. This assumption assumes that the US Federal Reserve believes that the targeted measures it has announced along with the US Treasury Department, aimed at propping up the banking system, are ineffective.
Technical analysis of the Sterling Dollar:
- On the near term and according to the performance of the hourly chart, it appears that the GBP/USD is trading within a neutral channel formation with a limited upward slope.
- This indicates that there is no clear directional bias in market sentiment.
- Therefore, the bulls will target short-term rebound profits at around 1.2198 or higher at the resistance at 1.2247.
- On the other hand, the bears will look to pounce on the gains around 1.2107 or below at the support 1.2058.
On the near term, and according to the performance on the daily chart, it appears that the GBP/USD is trading within a descending channel formation. This indicates a significant long-term bearish bias in market sentiment. Therefore, the bears will be looking to extend the current path of declines towards 1.1992 or below to support 1.1808. On the other hand, bulls will target long-term profits at around 1.2291 or higher at the resistance at 1.2443. I still prefer selling the GBP/USD from every upside.
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