Peter Nurse

Investing.com – The U.S. dollar edged lower in early European trade Monday, handing back some of last week’s gains at the start of a week dominated by central bank meetings. 

The Dollar Index, which measures the greenback’s performance against six other currencies at 3:10 AM ET (00810 GMT) dropped 0.2% to 97.035. This was a decline from Friday’s 18-month high of 97.441.

After falling to 1.1119 Friday, the stock rose 0.2%, or 0.1%, to 1.1166. The risk-sensitive index jumped 0.6% to 0.7031 on Friday. It had fallen to its lowest level since July 2020. 

Monday’s gains for traders are being backed by comments made by Jerome Powell, Fed Chairman. These remarks suggested that the U.S. central banking was considering more interest increases this year than those previously considered.

“Because of strong growth, elevated inflation, and a tight labour market, we now expect six rate hikes in 2022 of 25bp each instead of four, to be followed by four further such hikes in 2023 and one move in 2024,” said analysts at Berenberg, in a note.

Despite Monday’s weakness, the dollar can extend its rally until after the Federal Reserve starts raising interest rates, according to JPMorgan Chase.

“The market is still going to be in some sort of price discovery mode,” and “typically the peak of the dollar comes about one to two months after Fed liftoff,” said Daniel Hui, executive director of global FX strategy at JPMorgan (NYSE:) Securities, said in an interview with Bloomberg Television. 

The Federal Reserve is not the main focus of this week. Instead, central bank policy-setting meetings are scheduled in Australia and the U.K. in the coming days. 

On Tuesday, the meeting took place amid growing expectations of policy normalization. It could announce an end to quantitative easing. 

On Thursday, both the and will meet. But they are likely to come out with very different results. While it is not expected that the ECB will make any changes to policy, there is a high likelihood that the BOE will raise interest rates. This is after inflation jumped to its highest point in 30 years.

“Presumably the inflation forecast will be revised a lot higher and the market will be interested in reading whether the BoE still feels CPI will be above the 2% target in 2-3 years’ time – even with all the tightening priced in,” said analysts at ING, in a note.