WIKIFX REPORT: Dollar Ahead, Sterling Falls due to UK recession

The greenback became the champion of the forex market on (3/November). It was following the announcement of the Federal Reserve and Bank of England meetings result.

The result itself was something that shook the market. The Fed turned out to be taking a more hawkish stance than market estimates, while the BoE was even more pessimistic about the outlook for the UK economy going forward.

Consequently, GBP/USD plunged nearly 2 percent to touch a record low of 1.1156. This position was not predicted by many analysts and market participants before.

The Federal Reserve and BoE each raised interest rates by 75 basis points on separate occasions. However, the BoE's rate announcement also includes warnings of a recession that is worse than market estimates.

BOE Expectation about Inflation

The BoE expects inflation to peak at a 40-year high of 11 percent in the current quarter. However, that organization dismissed market expectations for further jumbo-sized rate hikes

The reason is that the United Kingdom economy is entering a period of recession. This situation could last for the next two years--much longer than the era of the 2008/2009 financial crisis.

Besides that, BoE expects a recession to result in the unemployment rate doubling by 2025. Such an economic situation requires a more cautious policy approach to make everything under control.

That is why; the central bank is likely to only be able to raise interest rates slowly. However, two MPC members dont give their support on 75 BPs increase.

Federal Reserve is More Optimistic

For your information, two MPC members unwilling to support a 75bps rate hike this month and given the possibility that the UK economy will be in recession at the next BoE meeting.

That is why; the prospect of a 75 bps hike from the BoE is too difficult to realise. This opinion was said by Jane Foley as a fx chief strategist at Rabobank.

The BoE's stance is in contrast to the Fed's relatively more optimistic. Federal reserve believes that the rate of inflation remains high, so it needs to raise interest rates aggressively.

It is still too early to think about pausing (the Fed's rate hike further). This was stated by the Fed Chairman Jerome Powell at a news conference after the meeting early yesterday morning.

Dollar Domination will be Continued

Juan Perez, director of trading at MONEX USA, said that the dominance of the dollar will continue. The reason is that the development of a recession in the global economy will move more “safe-seeking” capital to enter the US dollar.

Fed Chairman, Jerome Powell, yesterday said that it was too early to talk about a slowdown in the pace of rate hikes. That is as there was no sign of inflation declining.

The statement triggered a rally of the USD index or it is also known as DXY. This rally is above the 112.00 threshold in the New York session as people could see from the updates.

That condition was still happened although its position was slightly corrected to the 111.80s range at the beginning of yesterdays Asian session (3/November).

The Result of FOMC meeting Yesterday

The FOMC meeting yesterday raised the interest rates by 75 basis points for the fourth straight time, in line with consensus estimates. Powell also reiterated his intention to continue aggressively tightening monetary policy.

The situation like that is in contrary to previous market speculation, in order to control the pace of inflation. If people tighten monetary policy less, there will be some effects.

The next year or two people wikk realize that they haven't controlled inflation. Powell said that the Fed's next meeting in December is likely to raise interest rates by a smaller amount.

However, he warned of enormous uncertainty about how high interest rates would need to be done. He even hinted that terminal rates might end higher than policymakers had previously expected.