15.12.22: Bank of England and ECB Rate Decisions Crucial for Near-Term Sterling and Euro Moves against the Dollar
15.12.22: Bank of England and ECB Rate Decisions Crucial for Near-Term Sterling and Euro Moves against the Dollar
The latest Federal Reserve policy decision was broadly in line with expectations with Chair Powell continuing to warn over inflation. He certainly refused to sound the all clear, but also underpinned hopes that inflation will decline in 2023 and that rates are relatively close to a peak.
Hopes for an end to rate hikes relatively soon will help underpin risk appetite to some extent, but the global economy still faces a tough period.
The latest Chinese data also emphasised that global demand will be under pressure in the short term which will hamper confidence.
The next round of interest rate increases on Thursday should not alter the global rhetoric.
Markets will want to be optimistic over the 2023 outlook, but the data releases are liable to put this optimism to the test and the Fed rhetoric will also dampen spirits to some extent as it wants to limit any easing of financial conditions.
Pound US Dollar Exchange Rate Outlook
The Pound overall held a firm tone on Wednesday despite choppy trading during the day.
The Pound to Dollar (GBP/USD) exchange rate dipped below 1.2350 in an immediate reaction to the Fed statement, but rallied back above 1.2400 before trading just below this level on Thursday.
Consensus forecasts are for the Bank of England (BoE) to increase interest rate by a further 50 basis points to 3.50%.
There are, however, expectations of a split vote with the possibility of a surprise decision.
Forward guidance from the bank will be very important, although the bank is likely to underline uncertainty and will want to keep all options open.
Trends in global risk appetite will also be important for Sterling moves with equities less confident on Thursday which will limit Pound support.
The Pound is liable to dip if there is dovish rhetoric from the bank and, especially, if there is a smaller than expected rate hike.
GBP/USD is, however, likely to be resilient with solid buying on dips towards 1.2300 unless there is a very negative statement.
Euro (EUR) Exchange Rates Today
The Euro to dollar (EUR/USD) exchange rate dipped to 1.0620 in immediate reaction to the Fed policy statement before rallying to 1.0680 during Powell’s comments.
It settled around 1.0650 on Thursday as fragile risk conditions limited Euro support.
Consensus forecasts are for the ECB to increase interest rates by 50 basis points to 2.50% at the latest policy meeting, although there is a minority view that there will be a larger increase to 2.75%.
The latest set of forecasts will be released and the guidance from bank President Lagarde will also be important for Euro sentiment.
Lagarde is likely to reiterate the need to control inflation with commentary on economic conditions watched closely.
Hawkish guidance would support the Euro and it will jump if there is a 75 basis-point rate hike.
Markets will also be monitoring developments in risk appetite and energy prices with reservations over the outlook and EUR/USD is liable to edge lower.
US Dollar (USD) Exchange Rates Outlook
The Fed increased interest rates by 50 basis points to 4.50% from 4.00% which was in line with consensus forecasts and the vote was unanimous.
The statement reiterated that the Fed was highly attentive to inflation risks and interest rates are expected to increase further.
The latest forecasts of interest rates from individual committee members, the 2023 median estimate on the Fed Funds rate was increased to 5.1% from 4.6% previously with the 2024 estimate increased to 4.1% from 3.9%.
The dollar secured net gains in immediate reaction to the data with a Euro dip towards 1.0620.
Chair Powell reiterated that he anticipates that further rate increases will be necessary and that the labour market remains very tight despite a decline in vacancies. Powell added that the Fed still sees inflation risks skewed to the upside and again warned that it would be a mistake to ease policy too quickly.
Powell was confident that inflation would fall significantly next year and, although he poured cold water on the possibility of rate cuts in 2023, he did add that policy is getting close to being restrictive enough and the February decision will be based on forthcoming data.
The dollar overall lost ground after Powell’s comments amid hopes that rates are close to a peak, but there was a recovery in Asia on Thursday as risk appetite retreated.
The dollar to yen (USD/JPY) exchange rate secured a net gain to 135.90 and the dollar index recovered from 6-month lows.
ING commented; “today’s communications have not fed the dollar bears and we suspect investors will not want to chase the dollar too much lower into year-end. EUR/USD closing back below 1.06 for a couple of days would be the first sign that the rally had lost momentum.”
Other Currencies
The latest Australian labour-market data was stronger than expected with a 64,000 increase in November employment while unemployment held at 3.4%.
The weaker than expected Chinese data, however, was a key element in sapping support for the Australian dollar.
The Pound to Australian dollar recovered from lows below 1.8000 to trade just above 1.8150.
The latest New Zealand data was much stronger than expected with a 2.0% increase for the third quarter after a 1.9% increase previously and well above expectations of 0.8%.
The Pound to New Zealand dollar still posted a weekly high close to 1.9300 before a slight correction to 1.9260.
The Canadian dollar also remained fragile in global markets with the Pound to Canadian dollar (GBP/CAD) exchange rate just above 1.6800 and close to 9-month highs.
The Pound to Norwegian krone (GBP/NOK) exchange rate traded around 12.10 ahead of the Norges Bank policy decision.
The Day Ahead
As well as the ECB and BoE here are a further two interest rate decisions on Thursday.
The Swiss National Bank is expected to increase interest rates by 50 basis points to 1.00% while consensus forecasts are for the Norges Bank to raise rates to 2.75% from 2.50%.
Forward guidance from the banks will be important for currency moves.
There are also important US data releases with the latest New York and Philadelphia Fed manufacturing surveys which will have implications for confidence in the US outlook.
The latest data on jobless claims will also be released.
Trends in energy prices will also be a key element for risk conditions in the short term.
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