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Dollar firms on increased rate hike expectations

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Written by:
Myrsini Giannouli

24 February 2023
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Important calendar events

  • JPY: National Core CPI, Tokyo Core CPI
  • GBP: GfK Consumer Confidence, MPC Member Tenreyro Speech
  • EUR: German Final GDP, German GfK Consumer Climate
  • USD: Core PCE Price Index, Personal Income, Personal Spending, New Home Sales, Revised UoM Consumer Sentiment, Revised UoM Inflation Expectations, Fed Monetary Policy Report


The dollar firmed on Thursday on increased rate hike expectations and the dollar index touched the 104.8 level. US Treasury yields retreated on the other hand, with the US 10-year bond yield dropping to 3.91%. 

US GDP data on Thursday were disappointing, putting pressure on the dollar. Preliminary GDP for the final quarter of 2022 showed that the US economy expanded by 2.7% against expectations of a 2.9% growth. US unemployment claims were more optimistic than expected though, dropping to 192K this week versus the 200K estimated.

The minutes of the latest Fed meeting were released on Wednesday and were more hawkish than expected, boosting the US dollar and yields. The minutes confirmed that FOMC members believe there is still more work to tackle inflation. Even though FOMC members were in favor of reducing the pace of rate hikes, a pause in the central bank’s tightening policy does not seem to be on the cards just yet.

The Federal Reserve raised interest rates by only 25 basis points at its February meeting, bringing the benchmark interest rate to a target range of 4.50% to 4.75%. Rate hikes have become less aggressive and may continue at their current pace, but the Fed might raise interest rates for longer than previously expected. This means that there are likely still a couple of rate hikes up ahead, which may provide support for the dollar. Current market odds lean towards further tightening in the upcoming Fed meetings and an increase in interest rates up to 5.25%.

US Flash Manufacturing and Services PMI data on Tuesday exceeded expectations, boosting the dollar. Services PMI in February climbed to 50.5 from 46.8 in January. A print above 50 indicates expansion in the sector and is a sign that the US economic outlook is improving. Manufacturing PMI in February was still below 50 but climbed to 47.8 from 46.9 in January.

US inflation data last week showed that price pressures in the US remain high and are not easing at the pace anticipated. US headline inflation in January dropped to 6.4% year-on-year versus the 6.2% expected. This represents a marginal cooling from December’s 6.5% print. PPI data also surprised markets to the upside. The monthly PPI for January rose by 0.7% against expectations of a 0.4% raise and a 0.2% drop in December. January’s CPI and PPI inflation prints illustrate the danger of inflation becoming entrenched. Sticky inflation may induce the Fed to rethink its recent dovish pivot. 

The US economy is expanding at a higher rate than anticipated, as US GDP for Q4 of 2022 grew by 2.9% against expectations of a 2.6% growth. The US is likely headed for an economic ‘soft landing’ and recession concerns ease. 

Core PCE Price Index on Friday is the Fed’s primary inflation gauge and may have a considerable impact on the dollar in light of last week’s inflation data.



The Euro weakened against the dollar on Thursday, with EUR/USD dipping to 1.058. If the currency pair goes up, it may encounter resistance near 1.080. If the EUR/USD pair declines, it may find support at 1.048. 

Final Annual CPI data were released on Thursday for the Eurozone, causing volatility in Euro price. CPI data were in line with expectations, showing that headline inflation rose slightly in January to 8.6% on an annual basis, from 8.5% in December. Core CPI, which excludes food and energy, surprised to the upside, hitting a record high of 5.3% against the 5.2% expected. Sticky price pressures in the Eurozone are likely to affect ECB policy, forcing the EU Central Bank to continue raising interest rates.

EU Economic Forecasts indicate that the EU economic outlook appears to be improving, with an upgraded growth forecast for 2023. The EC lifted their growth outlook for 2023 to 0.9%, indicating that the Eurozone will narrowly avoid entering recession and the economy is slowly expanding. Inflation expectations were also downgraded, with headline inflation now expected to fall to 5.6% in 2023. Flash EU GDP data for the final quarter of 2022 confirmed the EC’s forecast, showing that the Eurozone economy expanded by 0.1%. 

The ECB raised interest rates by another 50 bp at its February meeting, bringing its main refinancing rate to 3.0%. ECB President Christine Lagarde has emphasized that the central bank aims to bring inflation down to its 2% target. Lagarde confirmed that another 50-bp rate hike would follow at the next monetary policy meeting in March, after which the ECB would re-evaluate its policy. Market odds are currently favoring an increase of the ECB refinancing rate to 4.0% by June.

EU inflation rates are decreasing, but they are still far from the ECB’s 2% goal. Final EU headline inflation dropped to 8.5% year-on-year in January from a 9.2% print in December, indicating that Eurozone inflation is cooling. The continued drop in inflation signals that the ECB’s efforts to tame inflation are bearing fruit. Price pressures in the Eurozone remain high though, and interest rates need to rise to combat inflation.

German Final GDP and German GfK Consumer Climate data are due on Friday but are not expected to have a considerable impact on the Euro. 

EURUSD 1hr chart



The Sterling weakened against the dollar on Thursday and GBP/USD declined to 1.200. If the GBP/USD rate goes up, it may encounter resistance at 1.214, while support may be found near 1.191. 

BOE member Catherine Mann stated on Thursday that inflation risks still run high and that the central bank should continue to raise rates. CPI data last week showed that UK headline inflation cooled at a higher pace than anticipated in January. British CPI fell to 10.1% year-on-year in January from 10.5% in December. 

After last week’s optimistic inflation print, market odds are leaning towards a 25-bp rate hike at the BOE's next monetary policy meeting in March. Cooling inflation rates remove some pressure on the BOE to continue its economic tightening. The BOE raised interest rates by 50 bp at its February meeting, bringing the official bank rate to 4.0%. Markets are currently pricing in a 25-bp rate at the next BOE policy meeting. Several market participants though believe that the British central bank will pause rate hikes completely.

UK Flash Manufacturing and Services PMI exceeded expectations this week, boosting the Sterling. Manufacturing PMI rose to 49.2 in February from 47.0 in January, against expectations of a 47.5 print. Even though a reading below 50 indicates industry contraction, the British manufacturing industry seems to be improving and has achieved solid growth in January. UK Services PMI was even more optimistic in February, rising above 50 for the first time in 7 months. February’s print came at 53.3 from 48.7 in January, which is a sign of solid recovery of the service sector.  

Recent GDP data showed that the British economy is slowing down. The British economy contracted by 0.5% in December, which was more pessimistic than the 0.3% expected. Preliminary GDP for the final quarter of 2022 showed stagnation, while GDP for 2022 came in at 4.1%. The IMF downgraded the UK’s growth forecast, predicting that the British economy will contract by 0.6% this year, which is also consistent with BOE forecasts.

The UK’s grim economic outlook limits policymakers’ ability to increase interest rates sufficiently to rein in inflation. The British economy is struggling, and policymakers will have to assess how much tightening it can withstand to bring inflation down.

GfK Consumer Confidence data are scheduled to be released on Friday and may provide information on the British economic outlook. MPC Member Tenreyro is also due to deliver a speech on Friday which may affect the price of the Sterling. 

GBPUSD 1hr chart



The Yen was volatile on Thursday, with USD/JPY climbing briefly to the 135.3 level and dropping back to 134.7 towards the end of the day. If the USD/JPY pair declines, it may find support near 133.3. If the pair climbs, it may find resistance at 135.1. 

The Yen exhibited high volatility on Thursday as BOJ Governor Haruhiko Kuroda gave a speech on the central bank’s future direction as his term in office is about to end. Kuroda expressed the opinion that the BOJ should maintain its ultra-accommodating policy to keep inflation steady. Kuroda was optimistic on the subject of Japan’s inflation, stating that inflation would drop back to the BOJ’s goal of 2% within 2023.

The Yen has been pushed down these past few days by expectations of the continued dovish policy after the announcement of the Japanese Government’s nomination for the post of BOJ Governor on Tuesday. As markets began to digest the news this week though, the Yen began to gain strength. 

Incumbent BOJ Governor Kuroda is a staunch supporter of an ultra-loose monetary policy and his term in office expires in April. Japanese Prime Minister Fumio Kishida nominated former BOJ member Kazuo Ueda for the post of BOJ governor on Tuesday. Ueda is an academic economist, and his stance is seen as more pragmatic rather than ultra-dovish. 

Most market analysts consider that Ueda will likely not be in a hurry to unwind the BOJ’s ultra-easy policy, but as yet his intentions remain unclear. Ueda will appear before the Japanese government's lower house known as the Diet this Friday. Markets eagerly await his testimony for signs of a pivot in BOJ policy. 

Japanese policymakers maintained ultra-low interest rates at the BOJ’s January meeting, keeping the central bank’s refinancing rate at -0.10%. Preliminary GDP data for the final quarter of 2022 showed a minimal economic expansion of 0.2%. Japan’s economic outlook is poor, raising recession concerns for the world’s third-biggest economy.

The BOJ purchased 10-year government bonds this week to maintain the BOJ’s upper yield limit of 0.5%. The bond-buying strengthened the Yen early on Wednesday but the currency retreated later in the day as the dollar rallied.

Headline inflation in Japan has also gone above the BOJ’s 2% target, touching 40-year highs and putting pressure on businesses and households. Increased price pressures and wages, raise concerns of a wage-price spiral and may force the BOJ to pivot towards a more hawkish policy.

National Core CPI and Tokyo Core CPI data are scheduled to be released on Friday for Japan. Volatility in Yen price is expected on Friday due to developments regarding the imminent change in BOJ leadership, especially in light of Ueda’s highly-anticipated testimony before the Diet.

USDJPY 1hr chart


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Written by:
Myrsini Giannouli

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