04.05.23: ECB Policy Decision and Forward Guidance will Drive Near-Term Sterling and Dollar Moves against the Euro
The outlook for monetary policies will remain an important element in the short term.
The relative outlook for interest rates between the major economies and yield trends will be a key driver for currency markets.
The Federal Reserve statement has reinforced expectations that the central bank will now pause interest rate hikes to assess economic developments and cut rates before the end of 2023.
If the ECB maintains a more hawkish stance than the Fed, the Euro will tend to benefit.
Another key aspect, however, will be the underlying economic outlook.
Concerns over the US banking sector have continued with short sellers moving on to fresh targets.
There will also be wider concerns that the aggressive monetary tightening over the past 12 month will cause wider damage to economies.
In this context, developments within the financial sectors will be very important.
Overall risk appetite will tend to weaken if fears increase which would support the yen and Swiss franc. There would also be speculation that central banks will have to reverse course quickly.
Jarrod Kerr, chief economist at Kiwibank commented; “There are a lot of concerns in the U.S. around the banking sector and the crunch on credit. This is a credit event and that feeds through to the economy quite quickly.”
He added; “So I think central banks, including the Fed, are at or very near the peak in their cash rates.”
There were no major UK domestic developments during Wednesday with global developments dominating.
Equity markets attempted to make headway which provided an element of support for the Pound in global markets.
The Pound to dollar (GBP/USD) exchange rate only briefly dipped below the 1.2500 level and edged higher into the Fed policy decision.
As the dollar dipped lower, GBP/USD hit 11-month highs just below the 1.2600 level before settling around 1.2585.
Overall risk trends will remain important in the short term with the ECB guidance also a key element.
If the ECB maintains a relatively hawkish stance, there will be scope for GBP/USD to move above the 1.2600 level, but sellers will regain control if equity markets slide.
Euro (EUR) Exchange Rates Today
The dollar moves tended to dominate during Wednesday.
The Euro to Dollar (EUR/USD) exchange rate edged higher into the Federal Reserve policy decision and posted further gains after the decision with markets assuming that US rates have peaked.
EUR/USD hit highs just below the 1.1100 level and very close to 12-month highs.
The ECB will announce its latest policy decision on Thursday.
Consensus forecasts are for the central bank to increase rates by a further 25 basis points to 3.75%, although there is some speculation that the bank will decide on a more aggressive 50 basis-points hike.
Forward guidance from bank President Lagarde will inevitably be very important for the Euro moves following the policy decision.
The Euro will be vulnerable if there are concerns over the economic outlook and, especially, if there are hints that rates are unlikely to be increased again.
According to ING; “we suspect President Christine Lagarde and her colleagues would probably struggle to exceed hawkish expectations.”
The bank added; “There is a risk that the hawkish ECB sends EUR/USD through 1.1100 today, but a) long positioning is quite stretched and b) a hawkish ECB is priced. This warns that EUR/USD could hang around this 1.10 area a little longer – particularly were the US equity sell-off to gain momentum.”
The bank also notes speculation that an option position at 1.1100 is being protected.
The US ADP jobs data was stronger than expected with a 269,000 increase in private-sector jobs for April, but wages growth continued to slow.
The Federal Reserve increased interest rates by 25 points to 5.25% at the latest policy meeting which was in line with expectations and the vote was unanimous.
The statement commented that inflation remains elevated and the Fed is highly attentive to inflation risks. It also, however, dropped references that it anticipates some additional tightening may be appropriate. The Fed will take into account the tightening seen so far, together with economic and financial developments, to determine whether further tightening is needed.
It added that tighter credit conditions are likely to weigh on economic activity and inflation.
According to Chair Powell, there are signs of the labour market coming into better balance and there is evidence that wages growth has shown some signs of easing.
He stated that there was not a formal pause for June and reiterated that the Fed would have to monitor the data releases and economic developments closely. Powell did state that policy is tight and that it was possible that rates are at a peak, but considered that rates were unlikely to be cut this year.
The dollar managed to recover from initial losses, but retreated again in Asia on Thursday with market expectations that the Fed will have to cut rates later this year.
Markets also remain wary over the US banking sector with further pressure on regional banks.
Overall, markets are more confident that rates will be cut later this year which sapped dollar support.
There will also be fears that the banking-sector difficulties will start to create important pressures on the economy.
These economic fears will tend to offset any potential dollar support on defensive grounds.
The Canadian dollar was hurt by lower oil prices and the Pound to Canadian dollar (GBP/CAD) exchange rate hit fresh 14-month highs at 1.7145 before a retreat to 1.7100.
The Pound to Australian dollar (GBP/AUD) exchange rate hit highs at 1.8920 before a sharp correction to 1.8800.
The yen has continued to regain ground over the past 24 hours as US yields retreated.
The Pound to yen (GBP/JPY) exchange rate retreated to just below 169.00.
The Swiss franc continued to gain support on defensive ground with the Pound to franc (GBP/CHF) exchange rate dipping to 1-week lows below 1.1100 before trading around 1.1110.
The latest US jobless claims data will be released on Thursday with further concerns over the labour market if there is a jump in claims.
Wall Street moves and unease over the US banking sector will remain a key influence during the day with global risks conditions crucial.
The Norwegian central bank will announce the latest interest rate decision with expectations of a further 25 basis-point rate hike to 3.25%
09.00 – Eurozone: Final services PMI (Consensus: 56.6)
09.00 – Eurozone: Final composite PMI (Consensus: 54.4)
09.00 – Norway: Interest rate announcement (Consensus: 3.25%)
09.30 – UK: Final services PMI (Consensus: 54.9)
13.15 – Eurozone: ECB refinancing rate (Consensus: 3.75%)
13.15 – Eurozone: ECB refinancing rate (Consensus: 3.25%)
Friday – Germany: Factory orders MoM (Consensus: -2.5%)
Friday – France: Industrial production MoM (Consensus: -0.3%)
Friday – US: Nonfarm payrolls (Consensus: +175k)
Friday – US: Private payrolls (Consensus: +152k)
Friday – US: Unemployment rate (Consensus: 3.6%)
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Tim Clayton
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