BOE announces back-to-back rate rise

Important Calendar Events

• GBP: MPC Member Broadbent Speaks, Construction PMI
• EUR: German Factory Orders, French Industrial Production, French Prelim Private Payrolls
• USD: Unemployment Rate, Non-Farm Employment Change and Average Hourly Earnings

USD

The dollar fell for the fourth day in a row with the dollar index going as low as 95.25, as traders digested the Federal Reserve’s statements. Last week the Fed’s hawkish stance led some investors to believe that the US central Bank would adopt an aggressive fiscal policy to tackle inflation. This week though, several FOMC members have set the record straight, ruling out more than four interest rate rises in 2022 and steep rate hikes as high as 50 base points. The USD fell as investor’s expectations of a tightening policy became more moderate and yields declined across the US treasury curve. 

Key economic indicators that may affect the dollar on Friday, include: Unemployment Rate, Non-Farm Employment Change and Average Hourly Earnings. These are important employment indicators and may cause some volatility in the currency, as it is widely expected that the Fed will evaluate financial and employment data in the US to formulate its monetary policy over the next months. 

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EUR 

On Wednesday, economic indicators showed soaring inflation rates around 5.1% in the Eurozone, putting pressure on the ECB to shift to a more hawkish fiscal policy. The much-anticipated ECB policy meeting was concluded on Thursday and the EU Central Bank kept its interest rates unchanged and continued its ultra-accommodating monetary policy, as expected. The ECB Monetary Policy Statement, though, contained hints that the bank might eventually start moving towards a less dovish policy. Mounting inflationary pressures in the EU seem to be finally catching up with the ECB, which might be forced to tighten its monetary policy within the year. This hint was sufficient for traders, and the Euro spiked following the ECB’s statement. 

The EUR/USD rate was catapulted to 1.145, as the Euro gained strength and the dollar weakened. The dollar is losing ground this week, as traders now expect that the Fed’s monetary policy will not be as aggressively hawkish as anticipated.  If the currency pair goes up, it may encounter resistance at 1.148, while if it falls, support may be found around 1.275 and further down at 1.118. 

A number of minor economic indicators are scheduled to be released on Friday for the Euro, including: German Factory Orders, French Industrial Production, French Prelim Private Payrolls. These however are not expected to cause high volatility for the Euro, in light of Thursday’s ECB meeting.

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GBP 

The Sterling was propped up on Thursday by BOE announcements that it would raise its benchmark interest rate to 50 base points from 25. The BOE raised its interest rate again in a consecutive meeting, after announcing a rate hike from 0.1% to 0.25% in its previous meeting in December. This is the first time since 2004 that the BOE has announced back-to-back rate hikes, indicating the BOE’s commitment to combat soaring inflation rates. The Monetary Policy Committee voted unanimously in favour of raising interest rates, although four of its members voted in favour of an even steeper rate hike by 50 bs. The sterling rose after the BOE’s announcements and BOE Governor Andrew Bailey’s speech following the conclusion of the meeting. GDP’s ascend was not dramatic though, as the BOE’s decision was widely expected and had been largely priced in.

Meanwhile, the uncertain political climate in the UK is putting pressure on the pound. British PM Boris Johnson is facing opposition even from within his own party and is pressured to resign. Following the release of the damning ‘party gate’ report, Boris Johnson’s position became even more strained, and he has been battered in recent meetings of the House of Commons and the British Parliament. 

GBP/USD climbed above 1.362 on Thursday, benefitting from a weaker dollar. If the GBP/USD rate continues its ascend, there may be resistance at the 1.375 level, while if it declines, support may be found at 1.332 and further down at 1.317. 

On Friday, the UK Construction PMI indicator is scheduled to be released, and BOE Deputy Governor Ben Broadbent is due to speak at the Monetary Policy Report National Agency Briefing and his speech may cause some volatility for the currency. 

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JPY 

The Yen fell even lower on Thursday and remains at its lowest levels in decades, creating problems for households, as imported goods, especially food and energy, are becoming increasingly expensive for Japanese households.  Gasoline prices in Japan continue rising, hitting the highest level in 13 years, despite emergency measures to keep the price down. 

The BOJ’s dovish monetary policy is creating a gap in interest rates between other major Central Banks, especially the Fed and the BoE who are raising their benchmark interest rates. The disparity in interest rates between the BOJ and other major Central Banks is hurting the currency, increasing the price of imports. The Japanese vice finance minister for international affairs, Masato Kanda, stated on Tuesday that the weak Yen has its advantages, such as highly competitive exported goods, but recognises the downsides of a weak currency, which might point to a change in fiscal policy in the future.

The Yen retreated against the dollar on Thursday, even as the dollar dipped, with USD/JPY climbing to 114.9, testing its 114.8 support. If the pair continues gaining strength, it may find resistance at 115.6 and at 116, while if it declines, support might be found at 114.8 and further down at 113.48.

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Written by:
Myrsini Giannouli

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