27.07.23: ECB Decision and Policy Guidance to Dominate Near-Term Sterling and Dollar Moves Against the EuroOne down two to go.The Federal Reserve po
27.07.23: ECB Decision and Policy Guidance to Dominate Near-Term Sterling and Dollar Moves Against the Euro
One down two to go.
The Federal Reserve policy decision on Wednesday was in line with market expectations with the further rate hike fully priced in ahead of the decision.
Fed Chair Powell insisted that there was no set plan and that forthcoming decisions will be determined by incoming data.
In this context, markets were able to maintain expectations that US rates will peak at 5.50%.
The ECB will announce its policy decision on Thursday and the Bank of Japan on Friday.
The decisions and guidance from the banks will continue to be crucial for all asset classes, especially at this stage of the monetary policy cycle.
Chinese policy developments will also be watched closely with expectations of further policy stimulus which would boost confidence in the global outlook.
As far as the US is concerned, tensions will build ahead of next week’s employment report.
The overall path to a soft US landing will still be narrow with fear increasing if the activity data is very weak or inflation data stronger than expected.
A combination of both would increase stagflation fears and undermine risk conditions, potentially boosting the dollar.
Softer US data and evidence of weaker inflation would undermine the dollar and boost risk appetite, especially if China engages in further stimulus.
Pound US Dollar Exchange Rate Outlook
The Pound overall held a firm tone on Wednesday, supported by solid risk conditions, with no major UK developments.
There are expectations that the Bank of England will continue to raise interest rates beyond the Federal Reserve and ECB with expectations of at least another two rate hikes from the UK central bank.
The overall yield structure helped underpin the UK currency and the Pound to Dollar (GBP/USD) exchange rate secured a gradual net gain to the 1.2950 level.
Overall risk appetite held steady and equity markets were able to make headway in Asia on Thursday with markets focussing on hopes for a soft global landing.
The Pound will gain net support if global risk conditions hold steady, but there is likely to be tough GBP/USD resistance on any move to 1.30 unless there is a notably hawkish ECB stance and weak US data.
Euro (EUR) Exchange Rates Today
There were no major Euro-Zone developments on Wednesday with caution ahead of the ECB policy meeting.
Concerns over the Euro-Zone outlook were offset by expectations that the ECB would look to maintain a hawkish policy stance at this stage.
The Euro edged higher after the Fed policy announcement with EUR/USD testing the 1.1100 area and settling just below this level on Thursday.
Consensus forecasts are for the central bank to increase interest rates by a further 25 basis points with the refi rate at 4.25%.
Guidance from bank President Lagarde will be crucial for the Euro and overall market reaction.
In particular, comments on the September policy decision will be watched very closely with Lagarde likely to insist that the bank is data dependent.
The stance on bond selling will also be pertinent.
Overall, the Euro can hold steady if Lagarde focusses on the inflation fight, but will struggle to sustain any significant short-term gains.
US Dollar (USD) Exchange Rates Outlook
The Federal Reserve increased interest rates by 25 basis points to 5.50% at the latest policy meeting which was in line with consensus forecasts and the vote was unanimous
The Fed Chair Powell stated that the impact of monetary tightening was being seen, but it would take time for the full effects to be seen. Powell insisted that the Fed was not set on hiking at every other meeting with the bank watching the data at every meeting.
In this context, it was possible that the bank could increases rates again in September or leave rates on hold.
He noted that there are two labour-market reports and two consumer prices inflation reports ahead of the September meeting.
Powell stated that policy is restrictive and that there are risks in doing too much or too little on monetary policy, but he also noted that staff are no longer forecasting a recession.
The principal message from Chair Powell was that the Federal Reserve is data dependent.
Markts overall do not expects further rate hikes with the chances of a September hike seen at close to 20% and near 30% for November.
US data will be watched closely and global trends will also be very important given that dollar weakness will also be dependent on a positive story for other major currencies.
ING notes the global dimension; “In terms of the data, our house call for further signs of US disinflation and slowing activity may deliver a gentle dollar bear trend into the next FOMC meeting in late September. The problem for dollar bears like ourselves is that growth prospects overseas do not look particularly compelling – especially in the eurozone where stagnation is at risk of turning into a contraction.”
ING expects the dollar will eventually lose ground.
Other Currencies
There was choppy trading in commodity currencies with reservations over the global economy gradually easing amid hopes for a soft landing in the US and global economy.
The Pound to Australian dollar (GBP/AUD) exchange rate strengthened to 1.9150 before a retreat to 1.9060.
The Pound to New Zealand dollar (GBP/NZD) exchange rate hit highs close to 2.0850 before a retreat to 2.0740.
The Pound to Canadian dollar (GBP/CAD) exchange rate consolidated around 1.7070.
There was volatile yen trading with significant position adjustment ahead of the Bank of Japan policy decision.
The Pound to yen (GBP/JPY) exchange rate dipped to 180.80 before a recovery to 181.50.
The Day Ahead
As well as the ECB policy decision there are also important US data releases on Thursday with GDP data for the second quarter as well as jobless claims.
Market expectations are for GDP growth of 1.8% and initial jobless claims of 235,000.
The overall importance of data releases will increase given the importance for Fed policy expectations.
Markets will continue to monitor any commentary from China surrounding interest rates or policy stimulus.
The Bank of Japan will announce its latest policy decision on Friday.
Consensus forecasts are that there will be no change in policy, but there is some speculation that there will be a tweak to the yield curve control programme.
There will inevitably be very volatile yen trading after the decision.
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