Dollar Edges Higher After Fed; Sterling Weakens Ahead of BoE Meeting

© Reuters.

By Peter Nurse

AiVIF.com - The U.S. dollar edged higher in early European trade Thursday, maintaining a positive tone as traders digested the Federal Reserve’s policy decisions.

At 3 AM ET (0700 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher at 105.030, after having climbed to a 20-year peak following the Fed meeting. 

The U.S. Federal Reserve raised interest rates by 75 basis points Wednesday, its biggest interest rate hike since 1994, and pointed to further steady rises this year to combat historically high levels of inflation.

That said, Fed Chair Jerome Powell stated in the associated press conference that “today’s 75 basis-point increase is an unusually large one and I do not expect moves of this size to be common.”

“Powell stated that the Russia/Ukraine war and China's coronavirus lockdowns continued exacerbating supply chains hence inflationary pressures,” said Stephen Innes, managing partner at SPI Asset Management. “By hinting at external factors, he threaded the needle well for risk assets here, giving investors a nugget of hope that we should not expect surprise moves of this size to be commonplace.”

Attention now turns to the latest economic releases for guidance, with data on housing starts and unemployment trends scheduled for later Thursday. 

“The Fed now needs the data to play along for the ride and inflation to not surprise on the upside again. If it does, 75bp for July and September will be quickly repriced,” Innes added. “But the risk of the market jumping to 100bp expectations seems to have been removed for now.”

EUR/USD fell 0.3% to 1.0411, with the announcement by the European Central Bank of a new purchase scheme aimed at stopping a widening gap between the yields paid by Germany and those of lower-rated countries such as Italy failing to offer much support for the single currency.

USD/JPY rose 0.5% to 134.49, with the yen under severe pressure ahead of the Bank of Japan’s policy decision on Friday, with the central bank so far maintaining a super-easy monetary policy as the Fed aggressively hikes.

GBP/USD fell 0.5% to 1.2113, with the Bank of England expected to deliver its fifth straight 25 basis point hike later Thursday, which would be something of an anticlimax after the Fed’s fireworks.

The BOE started tightening monetary policy earlier than its peers, potentially giving it room to move cautiously, but inflation hit 9% in April and is forecast to hit double digits later this year, well in excess of its 2% target.

USD/CHF rose 0.4% to 0.9978, with the Swiss National Bank also meeting later Thursday. 

The benchmark Swiss interest rate has been at -0.75% for more than seven years as the central bank has tried to weaken its “overvalued” currency, and a change is not expected at this meeting. That said, it’s debatable how long the SNB can resist joining the bandwagon of monetary tightening to combat rising inflation.

Elsewhere, the risk sensitive AUD/USD fell 0.3% to 0.6978, NZD/USD fell 0.4% to 0.6257 and USD/CNY fell 0.1% to 6.7050.