The forex market recorded significant volatility in reaction to the higher than expected US inflation data which could impact the Federal Reserve’s stance on monetary policy.
The US dollar could maintain a bullish long-term outlook and could move toward its peak for the year in March if monetary policy remains aggressive.
Despite retreating to a certain extent, yields persisted at elevated levels for the year, reflecting expectations of sustained interest rates at current levels before any potential cuts next year, which could support the dollar over the longer term.
Meanwhile, the euro could come under pressure as traders await the results of the European Central Bank’s meeting tomorrow.
While the ECB is facing elevated inflation, the deteriorating economic conditions in the euro area could affect its interest rate decision, creating some doubts over whether it would raise rates or keep them unchanged.
In addition, the weaker outlook for European economies, with Germany’s economy expected to shrink this year, could continue to weigh on the euro’s performance.
The British Pound could be weighed by the deteriorating outlook on the British economy. Traders reacted to the release of the weaker-than-expected UK GDP growth data, which unexpectedly contracted by 0.5%.
Additionally, the increase in the unemployment rate has also contributed to the concerns about the state of the economy which could affect the Bank of England’s interest rate decision next week, exposing the GBP to some uncertainty in the meantime.
