The USD index has settled under the 98.50 zone as the recent rally faded. Overnight, the greenback received a solid boost from Fed’s Powell who hinted at more aggressive tightening down the road to combat inflation.
However, the overall market reaction to a hawkish message was short-lived, with US stock index futures erasing yesterday’s losses while European equities add to previous gains. However, risk aversion could reemerge at any point as the geopolitical uncertainty surrounding Ukraine remains elevated.
Of note, Fitch Ratings has cut its world GDP growth forecast for 2022 by 0.7% to 3.5%, reflecting the drag from higher energy prices and a faster pace of US interest rate hikes. Also, in its gloomy economic outlook, the agency cited the Russia-Ukraine conflict and related uncertainties.
USD index keeps targeting 100.00
For the greenback, developments on this front mean that the underlying demand for the safe-haven US currency remains intact while the bearish potential is limited, especially as the Federal Reserve has started signaling more aggressive rate hikes this year.
As such, the USD index keeps targeting the 100.00 psychological level last seen in May 2020, albeit staying now below the 99.40 peaks seen earlier this month. The longer-term outlook for the buck is seen upbeat while above the 94.60 zone that capped the sell-off in January. In the near term, the index needs to hold above 98.00 in order to avoid a deeper downside correction.
Later this week, the US retail sales report will come into the market focus. The release could give an extra boost to the dollar if the figures surprise to the upside, thus adding to Fed rate hike expectations. The upcoming statements from Fed officials will be closely monitored by traders as well.
