Fed Powell’s Inflation And Interest Rates Rhetoric Crucial For Pound Vs Euro, Dollar

07.03.23: Fed Powell’s Inflation and Interest Rates Rhetoric Crucial for Near-Term Sterling and Euro Moves against the Dollar

Global monetary policy will continue to be a key element driving all asset classes including currency markets.

Central banks have already increased interest rates sharply over the past year to bring inflation under control.

There are hopes that rates are close to a peak, but there is still evidence of stubborn inflation, especially in the service sector, which will maintain pressure for further action.

Risk conditions will deteriorate if banks decide that they have to increase rates much further and the dollar would also tend to benefit.

A more dovish stance from banks and increased peak rate hopes would trigger a strong rebound in risk conditions.

The relative outlook for interest rates among major economies will also be a key element in driving currencies.

In the near term, rhetoric from Federal Reserve Chair Powell will be the next set-piece event with markets looking for fresh guidance.

Pound US Dollar Exchange Rate Outlook

The latest UK construction data was stronger than expected, but Sterling was unable to make any headway on Monday.

There were further expectations that the Bank of England would be less aggressive in raising interest rates.

The Pound to Dollar (GBP/USD) exchange rate did find support just above the 1.2000 level.

UK retail sales data indicated a stronger nominal rate of growth with a 4.9% annual increase in like-for-like sales, but sales continued to decline in real terms.

There was a more positive Pound tone on Tuesday with GBP/USD advancing to 1.2050.

Global developments will tend to dominate on Tuesday with Powell’s rhetoric and reaction in equity markets likely to have a key impact on the Pound.

Overall, GBP/USD has scope for further support near 1.2000 in the near term and there is scope for limited net gains if equities respond favourably to Powell’s commentary.

Euro (EUR) Exchange Rates Today

The Euro held a firm tone on Monday with expectations that the ECB would maintain a hawkish policy stance.

ECB chief economist Lane stated that hiking interest rates beyond March fits with what inflation pressures are suggesting, but he did not make any attempt at quantifying the scale of potential rate increases.

The Euro was able to make net gains despite disappointing business confidence data.

Overall, the Euro to Dollar (EUR/USD) exchange rate posted a net gain with highs around 1.0695 before settling around 1.0680.

The recent data has been disappointing which will tend to stifle further Euro buying, but the single currency should hold a firm tone on the crosses.

EUR/USD should also be able to make limited headway if Powell’s comments are broadly balanced, but will slide if Powell signals that rates will be increased 50 basis points to 5.25% this month.

US Dollar (USD) Exchange Rates Outlook

There were no significant US data releases on Monday and a lack of Federal Reserve commentary.

US yields edged higher after the New York open, but the 10-year yield traded below the 4.00% level and the dollar was unable to make headway with limited net losses.

Comments from Fed Chair Powell will be the key event on Tuesday.

There will be prepared comments from Powell, potentially the same as the semi-annual testimony released on Friday.

Powell will then face questions from the Senate Banking Committee with comments on inflation and interest rates watched closely.

He will not sound the all-clear on inflation and signal that further rate hikes will be needed, but is likely to reiterate that data will be crucial in driving decisions.

Assuming Powell reiterates the importance of data, the jobs report on Friday and consumer prices data next week are also likely to be extremely important.

Rabobank expects that Friday’s employment report will be the most important event. It noted; “A month ago it was the release of the vigorous January US jobs data that provided the pivot for a change in market sentiment. The forthcoming February employment numbers will signal whether that report was an anomaly or whether the market must accept that tight labour market conditions and associated inflation risks are significantly more entrenched than the consensus had hoped at the start of the year.”

It added; “Consequently, compared with the rest of this week’s scheduled events, we expect that the payrolls report has most potential to provide fresh direction for the USD this week.”

Other Currencies

The Reserve Bank of Australian (RBA) increased interest rates by 25 basis points to 3.60% at the latest policy meeting which was in line with consensus forecasts.

The bank still expects to increase interest rates further, but there was a marginal shift in language which suggested that the central bank could be slightly more patient in increasing rates further.

The Australian dollar dipped lower amid increased speculation that rates are near a peak.

The Pound to Australian dollar (GBP/AUD) exchange rate had already edged higher to 1.7850 and jumped to 1-week highs at 1.7950 after the RBA decision.

Swiss consumer prices increased 0.7% for February compared with consensus forecasts of a 0.4% increase with the year-on-year inflation rate increasing to 3.4% from 3.3% and above expectations of 3.1%.

The Swiss franc posted net gains after the data amid expectations that the National Bank would have to be more aggressive in raising rates.

The Pound to Swiss franc (GBP/CHF) exchange rate dipped to 10-day lows at 1.1175 before settling just below 1.1200.

The Norwegian krone remained under pressure despite firm oil prices with the Pound to krone (GBP/NOK) exchange rate posting 34-month highs above 12.50.

The Day Ahead

There are no major economic data releases on Tuesday with testimony from Fed Chair Powell likely to be the key event.

Overall trends in equity markets will be important in driving currency markets during the day.