The Fed Announces the Beginning of the Rise Cycle Supporting a Structural Strength for the Dollar

On January 26, the Federal Reserve announced its first decision monetary policy of the year in an environment of high volatility within the financial markets. In line with market expectations, the Fed kept the scope of the Fed Funds and confirmed that kick-off will end in early March. In addition, the institution emphasized that “with the inflation far above 2.0% and a working market strong, the Committee hopes that it will soon be appropriate to increase the Fed fund rate ”, which sends clear signals from the beginning of the increase cycle in the next monetary policy decision.

The market did not receive the statement surprisingly, given a fully discounted 25bps increase for the March meeting and + 99bps of cumulative implied increases for the end of the year. However, markets have adjusted their expectations reflecting a more restrictive attitude towards the central bank after the press conference in Jerome Powell. In this sense, the President of the Federal Reserve did not rule out the possibility of a more accelerated increase cycle through adjustments in each of the monetary policy decisions. In this way, the market now incorporates an increase of + 30bp in March and accumulates implicit increases of + 120bp in the year. During this time, analysts began evaluating the possibility of 50bps instead of 25bps increases, with some expressing their conviction for more aggressive adjustments.

Structural strengthening for the US dollar

The announcement of the monetary normalization process by the Federal Reserve has led to a strengthening of the US Dollar. In this sense, the DXY index reference commonly used to approach the North American currency consisting of a basket of developed currencies – has recovered to maximum levels not seen since July 2020 after a turbulent start to the year. This index rose by 1.6% during January, extending the positive dynamics of the previous year (+ 6.4% JoJ). In parallel, the DBXY index, a reference that also includes emerging currencies, collects gains of 1.4% in the month. Thus, performance within developed and emerging currencies is mostly negative. However, Latin American currencies remained defensive, driven in part by the restrictive attitude of central banks, as was the case with the Chilean peso (+ 6.1%), which Peruvian sol (+ 4.3%), which Colombian peso (+ 3.5%) and the Brazilian real (+ 3.2%). For the former, the central bank surprised the market with an increase of 150bp compared to expected 125bp, while Peru increased its rate by 50bp. Meanwhile, the market expects 75bps and 150bps increases in the following monetary policy decisions in Colombia Y Brazilrespectively.

For its part, the Mexican peso it separated from its emerging counterparts and built up a 1.1 percent depreciation. After the Fed’s decision, the currency returned to trading close to the $ 20.80 per dollar level – where the 50-day PM is also located (20.82) – extending the previous episodes of volatility where the last inflation reading was included. . While the carry appeal serves as an anchor factor for the currency, the volatile environment keeps it limited.

In the coming months, the US dollar will continue to strengthen thanks to the process of monetary normalization of the Federal Reserve, as materialized at the first meeting of the year, in an environment where uncertainty about the global economic growth and the geopolitical tension seëvier.

* The author is Deputy Director of Fixed Income, Exchange Rate and Commodities of Grupo Financiero Banorte.

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