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Euro and the pound take advantage of the dollar’s vulnerability. The Fed was late in raising rates

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The latest wave of the dollar’s decline has given rise to the hypothesis that the proposed rate increase in the United States has already been taken into account in the dollar’s quotes. Is it worth taking such opinions seriously?

HSBC believes that it is necessary to be cautious about such statements, which generally have no basis. This is just an assumption and some explanation of the latest correction of the dollar.

Expectations of policy tightening really turned out to be not as significant for the greenback as the markets expected. However, in the future, the trend of higher rates should support the dollar. A certain tailwind may be a decrease in global growth and higher profitability.

The dollar index on Friday began to show attempts to recover, on Monday this trend was picked up. The quote is consolidating near 95.00 and may continue to grow this week. The next resistance is marked at 95.73 (55-day SMA).

With bullish sentiment strengthening, the indicator has every chance to settle above 95.20, then reach 95.73 and test the high of the beginning of January at 96.46.

In general, it is not worth counting on strong dollar movements now, since the Federal Reserve is currently in a period of silence before the January meeting.

The support of 1.1400 in the EUR/USD pair resisted on Friday, but it is already clear that it is becoming difficult for euro traders to hold it. As soon as the demand for the dollar starts to increase, the euro will have no choice but to pass this level. After the EUR/USD drawdown below 1.1400, support around 1.1375 will come into play.

If the currency manages to stay above the level of 1.1400, then the technical picture further indicates a breakthrough of 1.1500, according to Scotiabank. With this development, the bulls will be able to go even higher.

The pound’s growth has stalled, the currency has faced strong resistance after a prolonged strengthening. The rally lasted almost a month, and the pound looks somewhat tired, as it gained more than 4% against the dollar during the last wave of growth.

Speculative interest in the pound was based on the hawkish rhetoric of the Bank of England. Now a more aggressive attitude of the Fed is being put into the quotes of the GBP/ USD pair, so the British central bank no longer looks as decisive as at the end of December last year.

The pound bulls took a pause, which can be regarded as the desire of traders to look around and assess the future prospects of the two central banks.

The GBP/USD pair suspended growth at the end of last week, it did not work out to develop an upward trend to 1.3700 and further. This mark has been the resistance level since September.

Bearish sentiment prevails, then the corrective pullback in the pound will continue with a high degree of probability. At the moment, the base scenario for the current year already assumes 4 rate hikes. None of the central banks of developed countries can boast of such a pace of tightening.

The chances of growth still cannot be ruled out. British employment data for December will be released on Tuesday, and December CPI figures will be released on Wednesday. If the results of the reports strengthen the markets’ expectations for a 25 bps rate hike by the BoE in two weeks, the pound will soar. First, the 1.3800 level will be tested, then the 1.4000 mark will be used as a target.

As for unfavorable factors for the pound, Prime Minister Boris Johnson’s popularity may decline.

In the future, the pound has a good chance of growth, it may be among the strongest currencies against the dollar. It’s all about the BoE policy, which has shown readiness for action.

Unlike the same eurozone, the UK has a chance not only to catch up, but also to overtake America in terms of the key rate in the next three years, and this means the growth of GB/USD.

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