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Fed rate hike causes high dollar volatility

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Written by:
Myrsini Giannouli

03 November 2022
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Important calendar events

  • GBP: Final Services PMI, BOE Monetary Policy Report, MPC Official Bank Rate Votes, Monetary Policy Summary, Official Bank Rate, BOE Governor Bailey Speech
  • USD: Unemployment Claims, Trade Balance, Final Services PMI, ISM Services PMI, Factory Orders


The dollar remained strong ahead of Wednesday’s Fed meeting, with the dollar index climbing to 111.6. The USD was volatile after the conclusion of the meeting, plummeting immediately after the announcement of the Federal fund rate and then shooting upwards. The dollar index plunged to 110.5 after the meeting and was quickly catapulted above 112. US Treasury yields followed a similar pattern, going strong in early trading but exhibiting high volatility after the Fed meeting. The US 10-year bond was yielding above 4.0% until the announcement of the Fed meeting outcome, after which it dropped to 3.9 and then skyrocketed above 4.1%.

Positive economic activity data early on Wednesday bolstered the dollar ahead of the Fed meeting. ADP Non-Farm Employment Change rose to 239K in October from 192K in September, beating expectations of a drop to 178K, as employers hired more workers. 

The US Federal Reserve voted to increase its interest rate by 75 basis points at its highly-anticipated monetary policy meeting on Wednesday. The Fed has so far increased interest rates by a total of 375 basis points this year, bringing its benchmark interest rate to 4.0%. Wednesday’s rate hike of 75 bps was in line with expectations, however, and had already been priced in by markets. Several market participants were even expecting a bigger rate hike. As a result, the dollar plummeted following the interest rate announcement but recovered shortly afterward.

The FOMC Statement issued by the Fed contained a subtle change in forward guidance. The tone of Wednesday’s statement was more cautious than before, indicating that the Fed may be pondering slowing the pace of rate hikes. Market expectations are currently in favor of a 50-bps rate hike in December and a 25-bps hike in January. Rate hikes are expected to taper off in 2023 as the central bank moves into a stable interest rate.

The FOMC Statement raised some doubts about whether the US central bank was already considering a pivot in its monetary policy. Fed Chair Jerome Powell however, re-affirmed the Fed’s commitment to bringing inflation down. At the press conference following the monetary policy meeting, Powell stated that it would be very premature to think about pausing rate hikes, saying that "we still have some ways to go." 

High-risk aversion sentiment has been prevalent throughout the year and is increasing the safe-haven dollar’s appeal. At the same time, the Fed’s increase in interest rates is attracting investors who seek higher returns, boosting the dollar. 

US inflation rose by 0.4% every month in September, reaching 8.2% on an annual basis, dropping only slightly from last month’s 8.3%. Price pressures continue to increase in the US, putting extra strain on the Federal Reserve to continue with its policy of monetary tightening. Inflation rates have proved to be resistant to economic tightening and continue to rise. 

Several indicators of economic activity are scheduled to be released on Thursday for the US, including Unemployment Claims, Trade Balance, Final Services PMI, ISM Services PMI, and Factory Orders. These may affect the dollar considerably in the wake of Wednesday’s Fed meeting.



The Euro gained strength on Wednesday in early trading but plummeted after the announcement of the Fed rate hike. The Euro continued trading well below parity with the dollar, dropping near 0.981 by the end of the day. If the EUR/USD pair declines, it may find support near the 0.963 level and further down at the 0.953 level representing the 2002 low. If the currency pair goes up, it may encounter resistance at the parity level and higher up near 1.009.

Economic activity indicators released on Wednesday for the Euro were mixed, indicating that the Eurozone’s economic outlook remains poor. French, German, Spanish, and Italian manufacturing PMI data for October were lower than September’s data pointing to a contraction in the manufacturing sector. German trade balance for September exceeded expectations, however, rising to 3.7B from 1.2B in August and against the 1.5B expected. 

The Euro has been on the decline since last week’s ECB monetary policy meeting. The ECB raised its interest rate by 75 basis points to 1.5% last week, the highest since 2009. Soaring EU inflation rates are forcing the central bank to hike rates aggressively to reduce price pressures. The ECB monetary policy statement and press conference following the announcement of the main refinancing rate held bearish undertones, however, weakening the Euro. ECB President Christine Lagarde’s speech lacked a forward bias, stating that future rate hikes will be considered on a ‘meeting by meeting’ basis. 

The US Fed also raised interest rates by 75 bps at its policy meeting on Wednesday, bringing its interest rate to 4.0%. The wide difference in interest rates between the ECB and the Fed is putting pressure on the Euro.

Record-high Eurozone inflation data failed to provide support for the Euro in the wake of the ECB policy meeting. CPI Flash and Core CPI Flash data on Monday far exceeded expectations. Eurozone inflation in October reached 10.7% versus September’s CPI of 9.9%. Price pressures continue to increase in the EU, driven primarily by energy prices. Core CPI, which excludes food and energy, was also up though, reaching 5.0% in October against expectations that it would remain at last month’s level of 4.8%. The ECB will need to continue its aggressive monetary tightening to tame soaring inflation rates.

Eurozone economic outlook however is poor, with analysts predicting stagnation later this year and in the first quarter of 2023, limiting the ECB’s ability to raise interest rates. Even though further rate hikes seem certain, the magnitude of the hikes may decrease if the EU economy cannot withstand aggressive tightening. 

Preliminary Flash GDP data seem to support this scenario. Flash GDP for the third quarter of 2022 shows economic growth of only 0.2% against an expansion of 0.8% in the previous quarter. Stagflation becomes a real headache for the ECB, which will be forced to battle inflation without the support of a robust economic background.

EURUSD 1hr chart



The Sterling collapsed after the Fed monetary policy meeting on Wednesday and GBP/USD dropped to 1.138. If the GBP/USD rate goes up, it may encounter resistance near 1.149 and higher up at 1.164, while support may be found near 1.125 and further down at the new all-time low of 1.035. 

The Fed’s sharp rate hike boosted the dollar on Wednesday, putting pressure on the Sterling. The highly-anticipated BOE monetary policy meeting is scheduled for Thursday. Coming a day after the Fed monetary policy meeting, the BOE meeting is likely to generate high volatility for the Sterling and the combined events may provide direction for GBP/USD.

Markets are expecting a shift towards a more aggressively hawkish policy after September’s inflation report, with odds in favor of a 75-bps increase on Thursday. A 75-bps rate hike has already been priced in and will likely not affect Sterling's price significantly. Market participants will follow the Monetary Policy Summary and BOE Governor Andrew Bailey’s speech closely, for hints into the central bank’s future policy direction.

The British economy is still struggling and policymakers will have to assess how much tightening it can withstand to bring inflation down. Annual inflation returned to 40-year highs in September, climbing to 10.1%, after cooling to 9.9% in August. Rising UK inflation is forcing the BOE to make some tough choices. The Bank of England raised its interest rate by 50 bps in its latest meeting, bringing the total interest rate to 2.25%. The BOE adopted a moderate stance, trying to strike a balance between battling inflation and supporting the sluggish economy. 

The Sterling has also been weakened after a protracted period of political instability. Political instability has been playing a major part in the currency’s decline over the past few weeks, driving the pound to an all-time low. 

PM Sunak vowed last week that economic stability will be at the heart of his administration’s agenda eliciting a positive reaction from markets. Foreign minister James Cleverly has indicated that the much-anticipated new fiscal plan, is expected on November 17th and is reported to be a complete reversal of the previous government’s controversial budget. Instead of tax cuts, the current government is likely to go with tax hikes, which will be a tough sell on the British public. 

The BOE has also announced a new round of bond buying. The British central bank will hold 8 bond sales Between November 1st and the end of the year, which will be evenly distributed across the short and medium-maturity sectors only in the 4th quarter of 2022. 

GBPUSD 1hr chart



The Yen exhibited high volatility on Wednesday, gaining strength early in the day but plummeting later on. USD/JPY dropped below the 147 level in early trading, then crossed the resistance near 147.7, touching the 148 level. If the USD/JPY pair falls, support might be found near 145 and further down at 143.5. If the pair climbs, it may find resistance further up at the psychological level of 150 and higher still at the 1990 high near 160.

The release of the BOJ minutes of the latest monetary policy meeting boosted the Yen early on Wednesday. According to the meeting minutes, BOJ Governor Haruhiko Kuroda reiterated the need to maintain the bank’s dovish policy to support the country’s fragile economy. Kuroda however, acknowledged for the first time the need to adjust the monetary policy in the future, if inflation in Japan consistently remains at the 2% target.

The BOJ policy meeting last week held few surprises, as the BOJ left its monetary policy unchanged as expected. The BOJ maintained its ultra-easy monetary policy keeping its main refinancing rate at -0.10%. Japan continues to pour money into the economy, while other countries are adopting a tighter fiscal policy. The difference in interest rates with other major Central Banks, especially with the Fed, puts the Yen at a disadvantage, driving its price down. 

The BOJ revised core CPI projections for 2022 to 2.9% from 2.3% previously, as recent inflation data in Japan exceeded expectations. The central bank also kept its 10-year Japanese Government Bond yield target at plus or minus 25 basis points around 0.00%. With the corresponding US bonds yielding above 4.0%, the difference in bond yields is putting pressure on the Yen. 

Japanese authorities likely staged interventions over the past week to support the collapsing Yen, as evidenced by the currency’s sudden surges. The USD/JPY Yen had moved well above the psychological level of 150 the week before, but plummeted suddenly in what was undoubtedly large-scale selling of dollars and buying Yen. The suspected interventions failed to stem the tide, however, and the Yen continued to retreat. The Japanese government cannot support the Yen indefinitely, as continuous interventions would not be sustainable. 

Japan’s Prime Minister Fumio Kishida announced last week an extra 29.1 Trillion Yen in budget stimulus measures that include steps to curb electricity bills, which could tame inflation. 

The USD/JPY rate is expected to depend primarily on the aftermath of the Fed meeting this week, although market participants remain wary of further surprise interventions from the government of Japan.

USDJPY 1hr chart


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Written by:
Myrsini Giannouli

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