Federal Reserve Heads towards Rate Hike - USD Strengthens

March 11, 2022 11:28

In today’s market commentary: 

  • US annual inflation heats up to 40-year highs in February 
  • USD strengthens on rate hike expectations 
  • EUR weakens amid geopolitical fallout
  • Oil market volatility prevails 

US inflation rose to 7.9 percent in February on a yearly basis increased mainly by fuel prices, said the US Bureau of Labour Statistics. 

USD bulls picked up steam as the currency strengthened on expectations that the Federal Reserve will hike key interest-rate guidance in the near term.  Meanwhile, US stock markets shed points on the prospect that interest rate hikes will make borrowing and investment more expensive later this year. On the brighter side, if interest-rate hikes do materialise, the banking sector could receive a boost in the short-to-medium term.  

Should the USD continue to appreciate against its counterparts, prices for US exports may track similar rises. Goods such as pharmaceuticals, semiconductors and fossil fuel exports are likely to become more expensive in the medium term, potentially adding to inflationary pressures.  

The EUR declined against the USD overnight as geopolitical woes in Europe weighed on sentiment and investors priced in the ECB’s signal that it will begin tapering QE by the third quarter.  

WTI Crude Oil moved down from five-year highs seen earlier this week and volatility is expected to prevail given the geostrategic risks centered around one of the world’s largest crude oil producers – Russia.  

As the USD rose, Gold was off its previous highs. Edgy market sentiment could spur more safe-haven buying if there are added geopolitical pressures and news headlines about the conflict on Europe’s doorstep.   

The VIX index appears to be on the rise as volatility in the global stock markets is a prevailing theme over the short term. As a result of geopolitical stressors, investor sentiment wrapped up this week with a focus on safe-haven assets to hedge market risks. 

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Sarah Fenwick
Sarah Fenwick Financial Writer, Admirals London

Sarah Fenwick's background is in journalism and mass communications. She has worked as a correspondent covering Swiss Stock Exchange news and written about finance and economics for 15 years.