The increasingly rising inflation globally brings a lot of speculation around the next move of central banks. While the Federal Reserve kept a steady narrative since mid-2021, the start of the year marked a turning point in its stance. In fact, the Fed hinted at reducing the balance sheet with the aim to increase long-term interest rates. Markets reacted accordingly, and the 10-year TIPS rate is expected to end the first month of 2022 with the highest rise in over two years.
Investors moved to rebalance their portfolios to match inflation-adjusted returns on safe-haven assets. Meanwhile, low rates encouraged investors to go for high-risk moves. As such, stocks were pulled down and further increased risk appetite.
The US Dollar behaved almost as expected in this scenario, as it benefited from yield support, the greenback is modestly up on the month against its major counterparts. The Euro held its ground and showed resilience while the New Zealand Dollar dipped drastically. This reflects the rise of the USD against risk-friendly currencies (such as AUD, NZD, CAD) in comparison to its lower performance against risk-averse currencies like the EUR, CHF, and JPY.
That’s why this week’s monetary policy announcement from the FOMC committee is an important event to watch as it may bring a shift in the market’s reaction. However, a brief respite from the Fed and steadied risk appetite might affect the EUR/USD if the former is indeed garnering support from an anti-risk flow. This might boost the greenback to a more advantageous position against the Euro once more.
*OspreyFX would like to state that traders should research extensively before following any information given hereby. Any assumptions made in this article are provided solely for entertainment purposes and not for traders to guide or alter their positions. Please read our Terms & Conditions and Risk Disclosure for more information.
Subscribe to our newsletter to receive our weekly updates + more straight to your inbox!