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Dollar rallies on hawkish Fed minutes

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Written by:
Myrsini Giannouli

23 February 2023
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Important calendar events

  • JPY: Bank Holiday
  • EUR: German Import Prices, Final Annual CPI, Final Annual Core CPI
  • USD: Preliminary Quarterly GDP, Preliminary Quarterly GDP Price Index, Unemployment Claims


The dollar rallied on Wednesday on hawkish Fed minutes and the dollar index was catapulted above 104.5. US Treasury yields remained stable, with the US 10-year bond yielding above 3.95%. 

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. 

Preliminary Quarterly GDP data are scheduled to be released on Thursday. These will provide important information on the US economic outlook and may affect dollar prices.



The Euro weakened against the dollar on Wednesday, with EUR/USD dipping to 1.060. 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. 

Eurozone fundamentals on Wednesday fell in line with expectations and did not affect the currency significantly. German inflation data for January showed an increase of 1.0% every month which may induce the ECB to tighten its monetary policy further. 

Flash Manufacturing and Services PMI data were released on Tuesday for some of the leading EU economies and the EU. Tuesday’s data pointed to solid growth in the services sector but a decline in the manufacturing industry. German ZEW Economic Sentiment and EU ZEW Economic Sentiment for February also exceeded expectations, indicating increased optimism in the Eurozone economy.

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.

Final Annual CPI  data are scheduled to be released on Thursday for the Eurozone and may affect the Euro price.

EURUSD 1hr chart



The Sterling weakened against the rallying dollar on Wednesday and GBP/USD declined to 1.203. If the GBP/USD rate goes up, it may encounter resistance at 1.227, while support may be found near 1.191. 

UK Flash Manufacturing and Services PMI on Tuesday exceeded expectations, 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.  

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 of the 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.

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.

GBPUSD 1hr chart



Japanese Yen traded sideways against the dollar on Wednesday, with USD/JPY climbing to the 135 level towards the end of the day. If the USD/JPY pair declines, it may find support near 131.2. If the pair climbs, it may find resistance at 135.1. 

The BOJ purchased 10-year government bonds on Tuesday 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.

SPPI data were released on Wednesday for Japan, which is a leading indicator of consumer inflation. SPPI climbed to 1.6% year-on-year in January, from 1.5% in December. Price pressures continue to rise in Japan, providing support for the Yen.

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.

The Yen was pushed down last week 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 Haruhiko 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.

Thursday is a Bank Holiday in Japan, and no fundamentals are scheduled to be released. Yen's volatility on Thursday may be due to developments regarding the imminent change in BOJ leadership.

USDJPY 1hr chart


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Written by:
Myrsini Giannouli

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