The interest rate market seems to be pricing in the possibility of rapid monetary policy tightening by the US Federal Reserve with increasing probability. There is talk of a pace of interest rate increases not seen in the US since 1994.
Contracts on the federal funds rate seem to indicate that interest rates in the USA may rise by as much as 2.25 percentage points by the end of the year, but after the March hike by 0.25 points. This would mean that the 2.5 percent level could still be reached in 2022. This, in turn, could potentially affect the US dollar.
Statements by Fed officials strengthen USD
And indeed, the USD index rises above 99.8 points on Friday, reaching its highest level in nearly two years and approaching 100 points. This week, the scale of growth reaches 1.3% and if it continues until the weekend, we will see the biggest weekly increase in a month. That may have been influenced by statements from several Fed officials who have called for faster interest rate hikes to curb rising inflation.
The latest Federal Reserve minutes also show that many Fed officials are ready to raise interest rates in 50 basis point increments in the coming months, as well as begin reducing the central bank's massive balance sheet starting in May. Moreover, the war and growing sanctions against Russia for its attack on Ukraine may have increased demand for the dollar as a safe haven.
Euro exchange rate to tremble after French election?
After the US Dollar strengthened, the exchange rate of the main currency pair EUR/USD fell to 1.0850, its lowest level in a month. However, this may not be the only factor influencing such a relatively low valuation of the Euro. The political risk factor regarding the presidential elections in France may also be at play here. If there was a change of power and the Eurosceptic Marine Le Pen took office, the EUR/USD's potential target could be the 1.00 level.
In 2017, such political risk could also be built into the EUR/USD exchange rate. However, when it became clear after the weekend that Emmanuel Macron would become president, an upward gap of around 200 pips emerged and the EUR/USD exchange rate started to rise systematically. From this perspective, it is worth keeping in mind the possibility of higher volatility also after the coming weekend.
Daniel Kostecki, Director of the Polish branch of Conotoxia Ltd. (Forex service)
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