In November, the financial market reversed sharply. After the meeting, the US Federal Reserve raised interest rates by 0.75% as expected, which is the fourth consecutive rate hike by the same rate. The Chairman, Powell hints at slower pace of rate hikes in December, but it means that monetary policy will continue to be tightened at the same time, and the final interest rate may be higher than previously expected. Although the US dollar index first fell and then rose that day, the mentality of investors has begun to change. Afterwards, many Fed officials agreed that it is time to consider adjusting the pace of interest rate hikes. The latest consumer price index CPI and wholesale price index PPI also reflect that inflation continues to fall, making the market more convinced that the stage of the Federal Reserve's substantial interest rate hike is over. The interest rates haven't reached at peak yet, but they shouldn't be far off. Once the expectations of investors change, a large number of positions established in the past period of time need to be adjusted immediately. The stock market and non-US currencies strengthened across the board, and the US dollar index will be stable when it falls to 105.35 near the 200-day moving average.

This cycle of rising US dollar index triggered by US interest rate hikes should have peaked at 114/115, and the market will lack direction after the upward trend is disrupted. The Fed is not stopping raising interest rates now, and it is estimated that there will be at least a 1% increase, depending on inflation and economic performance. On the other hand, the economic fundamentals of the US are still slightly better, compared with the possibility of recession in the euro area and the UK. Therefore, the US dollar may fluctuate at low levels but it does not seem to turn around and fall sharply. There will be support in the 104/105 area.

The Bank of Japan may predict that the Federal Reserve is preparing to adjust monetary policy, so it will intervene on a large scale at 152 in advance. The intentional or unintentional cooperation between the two parties caused the yen to rebound rapidly to 138 against the US dollar. The Bank of Japan continued to adhere to the loose monetary policy. Although US bond yields have fallen, the US-Japan interest rate gap is still huge, which should limit the yen's rebound. On the other hand, Japan's latest core CPI has risen to 3.6%, which has been higher than the central bank's 2% target for seven consecutive months. It is not impossible for the Bank of Japan to adjust the yield curve control target. It is estimated that it will be very difficult for the US dollar to regain 145 against the yen. The recent rebound cannot even subdue 143. It may be necessary to try 135/136 first.

Patrick Law

General Manager of Hantec Group