Fed to air on the side of raising rates more to bring inflation down, supporting the USD – Morgan Stanley

There has been a lot of market movement in recent months, so as we exit the summer, what are the market stories and valuations that investors should be aware of? Economists at Morgan Stanley expect the US dollar to remain strong while the euro and the pound should continue weakening.

US economy is seeing elevated inflation and still strong growth

“The US economy is seeing elevated inflation and still strong growth. That makes it likely that the Federal Reserve will have to air on the side of raising rates more to bring inflation down, which would further invert the US yield curve and support the US dollar.”

“Europe is in the midst of a major energy crunch, that in our base case will push the economy into a mild recession. Markets expect that the European Central Bank will raise rates significantly more than the US Federal Reserve over the next 12 months, but given our risks to growth we disagree, a reason we forecast a weaker euro. The economic situation in the UK is also very challenged, leaving us cautious on gilts and the UK pound.”