War in Ukraine, Covid in China, and Central banks' policies
Continuing uncertainty about conflicts in Ukraine and higher inflation supporting US Dollar. And while the US dollar is increasing against both Pound and Euro, the Sterling has a better position compared with Euro.
Europe, the biggest victim of war
Overall, rising energy prices weigh on all economies, but not equally. Russia's invasion of Ukraine increased the Energy, food, and insurance prices. Among these mentioned economies, the United States has almost nothing to do with Russian Gas and Oil; the UK also has the same situation, as both economies produce as much as their needs. The even United States is taking advantage of this mess and increasing its export volume. Since European and primarily Germany's economy directly depend on Russian Energy, Euro here can be hit more. And against the weakness of the Euro and the Pound, this conflict increases the USD dollar safe-haven demand.
China's Zero covid policies
Fewer economic growth in China as the biggest global factory, slowing the international economic development, also lifted the US dollar demand while putting more pressure on the European economy and Euro. The latest covid outbreaks in Beijing and Shanghai caused many close factories in China. While many factories and businesses are closed, lower Retail Sales and industrial production also negatively impact there.
Inflation and central banks policies
While inflation increases and we face lower economic growth, central banks' reactions differ. This significant policy divergence puts the US dollar in a stronger position, as FED got more hawkish policies than ECB and BoE. This policy divergence with causing higher bond Yields in the US and more demand for US Dollar. Bank of England also had more hawkish reactions with multiple rate hikes than ECB.
Andrew Bailey, BoE governor, said he is sorry for an "apocalyptic" view of the world, adding that monetary policy faces its biggest test in 25 years with surging inflation exacerbated by war in Ukraine and China's COVID lockdowns. Last week, FED Chair Mr. Powell said that controlling inflation will "include some pain." European Central Bank president Christine Lagarde will speak later on Tuesday.
Market Reaction
As a market reaction, we could see that both Euro and Pound increased against the US dollar. EURUSD was last seen trading near 1.055 and Cable near to 1.25 level. According to the mentioned reasons, the US dollar still could stay in demand in the long term. Therefore these returns are more like a short-term correction than a trend change. Technically 100 is the key support for the USD index, with the first support at 103. As long as the index trades above these levels, the bulls have complete market control.
