The US dollar remained on a downtrend overall, despite stabilizing to a certain extent over the last few weeks, as traders take central banks’ monetary policy changes into account.
While attention was focused on the Federal Reserve and the European Central Bank last week, the Bank of England’s interest rate decision could be the main event this week and could strongly impact the strength of the dollar against its British peer.
Bas Kooijman, Chief Executive Officer at DHF Capital said, “The Bank of England is expected to raise interest rates at their next meeting and could continue to do so at their subsequent votes.
“The central bank could be enticed to maintain an aggressive monetary policy to fight elevated inflation levels when other major economic blocs like the US and the EU have been able to pull it down to a certain extent.
“The trend could close the gap between interest rates in the US and the UK and help push the British pound to new highs. In this regard, treasury bond yield spreads have been shrinking during the last couple of months. Those spreads could turn even more in favor of the pound if the Federal Reserve effectively pivots its policy.
“The US central bank raised interest rates last week but is expected to pause hikes while the effects of the rapidly tightening monetary policy become clearer. The institution could also be monitoring the credit tightening that might emerge from the issues in the US banking sector.
“Later this year, the Federal Reserve could decide to start lowering its interest rates, in particular, if a recession becomes inevitable.
“Declining interest rates could further weaken the US dollar against its major counterparts including the euro. The European Central Bank is also expected to continue raising interest rates as well, as mentioned by its president Christine Lagarde.
“Traders could monitor US inflation data on Wednesday and volatility could become elevated in case of a surprise.”