The global economy looks set for a global recession and against this backdrop, the USD which is in a big uptrend already is a buy on any pullbacks. Our view of the fundamentals, sentiment, and key technical levels to look out for below.
Robin Brooks who has been very accurate in terms of his calls on the global economy notes “We’re on the brink of a global recession. We forecast global growth of 2.2% in 2022. All of that is “carry,” i.e. a base effect from COVID recovery in 2021. Global GDP is flatlining”
Some charts below in relation to this we can see global growth slowing as financial conditions tighten. We know that China which has powered global growth is slowing and it will slow further and this is already hurting emerging markets – there is more pain to come as central banks remain hawkish in terms of raising rates to cool high inflation.
The Fed is hawkish and will raise rates aggressively. We have seen the USD ease back this week but the big trend is up and the correction is a buying opportunity.
“Federal Reserve Chair Jerome Powell emphasized his resolve to get inflation down, saying Tuesday he will back interest rate increases until prices start falling back toward a healthy level.” (CNBC)
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He was very hawkish…“If that involves moving past broadly understood levels of neutral we won’t hesitate to do that. We will go until we feel we’re at a place where we can say financial conditions are in an appropriate place, we see inflation coming down.” He noted rate rises of 50 bps were appropriate going forward.
“A hawkish Federal Reserve has boosted the US dollar against most G10 and emerging market currencies year to date, and we believe this trend is likely to continue. Given our view that the Fed is likely to tighten policy aggressively, we believe capital flows should revert back toward the United States.
As far as the G10 currencies, we believe financial markets may be priced for too much tightening by many foreign central banks. As markets adjust to a more gradual pace of tightening abroad, G10 currencies should weaken and the U.S. dollar should get a tailwind.” (Wells Fargo)
We agree broadly with the above also supporting the USD is the reduction of the balance sheet and also safe-haven flows.
The USD has been in a strong uptrend and it has corrected back to the 20-day moving average and the 103.00 level which is expected to hold the pullback – more strength is expected and the target on the monthly chart is 1.1000.