The US dollar had a lukewarm week, slipping by 0.10% to 101.68 as positive sentiment from tech earnings boosted the equity market. However, with the Federal Reserve’s monetary policy decision and the nonfarm payrolls survey coming up, traders are advised to brace themselves for potential turbulence.
The Fed is expected to raise interest rates by 25 basis points to 5.00%–5.25% as part of its ongoing efforts to reach the target inflation rate of 2.0%. However, this decision is believed to have been priced in, and traders are more interested in the guidance for the future.
US Dollar to Weaken Further if Fed Halts Tightening Campaign
Last month, the FOMC hinted that their tightening campaign may be coming to an end due to increased risks to the economy, so traders are eagerly waiting for comments on the outlook. If the Fed hits the pause button, the US dollar could weaken as traders try to front-run the next moves, potentially leading to rate cuts.
This Friday, the nonfarm payrolls survey will be released, providing insight into the employment situation in the US. A higher-than-expected increase in nonfarm payrolls could put pressure on the Fed to continue rate hikes, leading to a stronger US dollar. Conversely, a lower-than-expected increase may indicate a weaker economy, adding to the bearish bias on the greenback.
Monetary policy divergence could play a significant role in the US dollar’s future. Other key central banks, such as the ECB, are still hiking borrowing costs a few more times this year, which could put the US dollar at a disadvantage. If the Fed decides to pause its rate hikes, traders may attempt to front-run the next moves, potentially leading to rate cuts, which could further weaken the US dollar.
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