As anticipated yesterday, the United States Dollar starts this morning’s session largely on the back foot against most major currencies after Jerome Powell and the Federal Reserve held interest rates steady this month.
Overview
Though the statements from the Fed were as hawkish as they could possibly be with this “skip,” this move still places the central bank in stark contrast with others around the world that have continued to hike rates this cycle in the face of entrenched inflation. In a macro sense, it’s a good thing that the Fed will likely be able to end its hiking cycle earlier than most banks, as it means the inflation outlook from the US is faring better than in other places, but this move is still driving demand for the Buck down and depressing prices.Powell did re-emphasize that there is likely at least one more rate hike coming from the Fed during his press conference, limiting price action yesterday afternoon with his steady hand. The prepared statement that accompanied the decision struck a much more decisive tone than previous ones, and expectations of a 25-basis point hike in July are higher than they were yesterday morning. Once again highlighting the importance and prudence of a data-driven approach, markets were relatively calm following the release.
The European Central Bank, by contrast, did hike interest rates a further 25 basis points this morning, prompting a sharp gain from EUR against USD. As we have discussed this week, the divergent decision of the Fed versus most other central banks will likely continue to put pressure on the Buck in the weeks to come.
What to Watch Today…
- No major economic events are scheduled for today
- Monex USA Online is always open
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EUR ⇑
The single currency this morning is the big winner on the G10 board, gaining half a percent against USD after its interest rate decision at 8:15 AM. Against expectations of a “dovish hike” out of the European Central Bank, the ECB struck a hawkish tone this morning as it continued to fight inflation in the region and surprised markets. Christine Lagarde showed clear concern that the inflation outlook for the region this year still is forecasted to be well above 5% and may not return to the 2% target range until after 2025. Currently, markets expect at least one, likely two more hikes from the ECB.
GBP ⇑
Pound Sterling is on a rocket ship to the moon versus USD this month, gaining more than 3 percent since May 31, including a third of a percent this morning as traders assess the Bank of England’s new likely terminal interest rate of 6%. The inflation outlook of the UK remains far worse than that of either the US or Europe, prompting traders to place bets for four more consecutive rate hikes from the BoE. Their cycle will continue at next week’s meeting, and its governors will have to strike a much firmer tone than that of the Fed to combat the “cost-of-living crisis” gripping the UK
