US dollar heading for another rate hike

The US dollar could record some gains as markets increasingly see a higher probability for the Federal Reserve to raise interest rates one more time at their next meeting. The constant surprises in US economic data during the last few weeks have maintained traders’ attention on the US currency, fueling some volatility in the process. Analysis by Wael Makarem, Senior Market Strategist – MENA at Exness

On top of economic indicators, traders could give more importance to company earnings with earnings season starting. Strong bank earnings in particular could help calm concerns about the banking sector’s health and could give more room for the central bank to raise interest rates. Previously, the confidence crisis in US banks has affected expectations on interest rate decisions.

Global economic risks could also play in the dollar’s favor over the medium term as investors brace for more economic slowdown this year. If other major economies see a stark decrease in output, investors could move to safer dollar-denominated assets.

The Japanese yen could see more weakness against the dollar in the near term with the Bank of Japan maintaining its accommodating monetary policy. However, some risks remain in this regard if the new Japanese central bank governor decides to break with the current trend.

While markets are increasingly certain the Federal Reserve could raise its interest rates at their next meeting, probabilities point to a change in the monetary policy’s direction afterward. A pause in interest rate hikes could be the next step, which could affect the dollar’s strength against other major currencies and the euro in particular if the European Central Bank maintains its hawkish stance.

The ECB could potentially move to 25 basis point hikes, lowering the upside potential for the euro. At the same time, the central bank could continue to raise interest rates for longer than its US counterpart, giving more support to the euro area currency over the longer term.