U.S. dollar is likely to weaken in the medium term

21 July 2023 159
U.S. dollar is likely to weaken in the medium term

Expected interest rate hikes by the Federal Reserve next week could be the last of its monetary policy tightening actions, former Fed Chairman Ben Bernanke said.

As he stated on Thursday in a webinar hosted by Fidelity Investments, it seems quite clear that the Fed is about to raise interest rates by another 25 basis points at its next meeting. There is a chance that this hike in July might be the last one.

Investors seems to agree. Based on trading in the federal funds futures market, they estimate the chances of an additional rate hike as limited.

Speaking as a senior adviser to Pacific Investment Management Co. Bernanke noted that he sees inflation declining more steadily to the 3%–3.5% range over the next six months as rent growth falls and auto prices drop.

According to Bernanke, by early next year, inflation will decline to 3–3.5%, and then the Fed will lower its target to 2%.

Personal Consumption Expenditures (PCE) Price Index, the Fed’s favorite measure of inflation, rose by 3.8% in May year-on-year. The core PCE price index, which excludes food and energy costs and is more representative of main trends, as Fed officials consider, increased by 4.6%.

Looking at the labor market, while the number of vacancies has decreased for each unemployed person, about 1.6 jobs are still open.

He suggested that the U.S. is likely to suffer from slower economic growth as part of the price for lower inflation, while emphasizing that any recession is expected to be mild.

According to the former Fed chairman, a modest increase in unemployment and a slowing economy are expected ahead. A deep recession next year is unlikely.

Clarity on the outlook will probably come in the final Fed statement and at the press conference of the current сhairman.

If the ex-chairman's assessment is correct and the Fed aims to gradually wind down tightening, the U.S. dollar’s systematic weakening is expected in the second half of the year.

Technically, this might indicate growth prospects for the EURUSD currency pair towards the round level of 1.1500.

It is important to keep in mind that since this is the medium-term outlook for the next six months to a year, a wide price fluctuation corridor is expected. It is essential to calculate risks in such a way that there is a sufficient margin of safety in case of significant downward corrections of EURUSD.

The final recommendation is to buy EURUSD with a target of 1.1500.

A Stop-loss order is set at 1.0500.

This content is for informational purposes only and is not intended to be investing advice.

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