On Monday, the US dollar declined against a basket of its peers, as investors were assessing the implications of another interest rate hike by the US Fed on the economy, which could be on the brink of recession.

Rate hike

It is widely expected that the US Federal Reserve would increase the interest rate by 75 basis points when its policy meeting comes to an end on Wednesday.

Another hike of this magnitude would effectively mark the end of support that the economy had been given during the coronavirus pandemic.

As per CME’s Fedwatch Tool, there are 75% expectations of a rate hike of 75 basis points by the Fed, while 25% expectations believe that there could also be a 100 basis points increase.

According to recent data, an economic slowdown appears to be happening, but inflation continues to be stubbornly high. Unemployment claims rose last week to their highest number in eight months and there was also a slump in regional manufacturing gauges.

Economic data

Another important event in the week that investors are eying is the release of the gross domestic product data in the US for the second quarter. It is possible that it shows negative growth, which would meet the traditional criteria of a recession.

The measure of inflation preferred by the Fed is personal consumption expenditures and this data is scheduled for release on Friday.

Market analysts said that a 75 basis points hike in the interest rates is expected and no data was going to change this outcome for now.

However, they added that equities do not seem to have any direction for now and the US dollar continues to deliver a strong performance, even though it has pared some gains because of investors taking profits.

There was a decline in the dollar index by 0.244% to reach at 106.420, while a 0.14% gain was recorded in the euro to reach $1.0224.

Equities impact

The greenback recorded its biggest decline in two months last week, as the appeal of the safe-haven currency took a hit because of a rally in equities. Moreover, the euro was also able to reach a two-week high, thanks to a rate hike of 50 basis points by the European Central Bank (ECB).

On Monday, Martins Kazaks, the Governor of the Latvian central bank, said that more such rate hikes could be expected from the ECB.

The day saw US equities lose some of their gains with the week set for a slew of corporate earnings, including some big tech companies like Amazon.com Inc., Apple Inc., and more.

Investors are keeping an eye on the earnings season to see if there are any signs of an economic slowdown and assessing the impact of a strong US dollar on company profits.

There was also a 0.44% decline in the Japanese yen against the US dollar, which saw it reach 136.65 against the dollar. Meanwhile, the Sterling recorded gains of 0.37% against the dollar to trade at $1.2047.