The US dollar plummets on Thursday as the US Federal Reserve said that it had reached a turning point in the battle against inflation, giving investors hope that the rate-hike campaign is about to come to an end.
US DOLLAR DROPPER
Investors followed Fed Chair Jerome Powell’s dovish lead when he said on Wednesday that “the disinflationary process has begun” in the biggest economy in the world, even if he also hinted that interest rates would keep increasing and that cuts were not imminent. The Federal Reserve first explicitly acknowledged decreasing inflation in its statement on Wednesday, which was released after the completion of its two-day policy meeting when officials decided to hike rates by 25 basis points. The U.S. dollar index hit a new nine-month low of 100.80 versus a basket of currencies as a result of Powell’s comments. After falling more than 1% on Wednesday, it was last down 0.12% at 100.83.
According to Ray Attrill, director of FX strategy at National Australia Bank, “there was very much a kind of relief, that there was nothing there to really really question the market’s prevalent opinion.” Although Powell predicted that rates will need to stay low for some time, the market still predicts that it will only be six months rather than two years. After gaining 1.2% the day before, the Australian dollar surged to a fresh eight-month high of $0.7158 in early Asia trading on Thursday. The value of the dollar decreased by 0.55% to 128.21 yen. The New Zealand dollar, which also increased by more than 1% on Wednesday, recently traded 0.25% higher at $0.6523. With the Fed out of the way, the European Central Bank and the Bank of England will now be able to announce their interest rate decisions later on Thursday. Each bank is expected to raise rates by 50 basis points.
After rising 1.2% the day before, the euro increased to a nearly 10-month high of $1.1034 on Thursday. Meanwhile, the pound was last trading 0.19% higher at $1.2399. The possibility of receiving a hawkish 50 from the ECB and a dovish 50 from the Bank of England is a risk and might lead to volatility, according to Attrill of NAB. According to statistics released on Wednesday, euro zone inflation declined for the third consecutive month in January. However, the ECB may not feel much comfort since underlying price increases remained stable and questions have already been raised about the accuracy of the data. According to Attrill, “I don’t believe it will have an impact on the ECB’s narrative, which I think will still be that they have a lot of work to do.” Although Wednesday’s data indicated that job vacancies unexpectedly increased in December, indicating to a still-tight labor market, it will be Friday’s nonfarm payrolls report that will be the next test of the Fed’s battle against inflation in the United States.
In contrast to earlier predictions of a peak of just below 5%, markets now anticipate the Fed funds rate to reach just below 4.9% by June.
BRUNSWICK PUND
Reuters: As investors got ready for important central bank meetings, including the Bank of England on Thursday, sterling fell slightly against the euro and remained stable against the dollar on Wednesday. Investors carefully followed the conclusion of the Fed meeting as they expected the BoE’s tightening cycle to come to an end shortly with a rate rise of 50 basis points on Thursday and 25 bps in March. They will concentrate on the revised economic predictions from the BoE Monetary Policy Committee, which may include an increase in 2023 GDP expectations owing to stronger domestic demand and reduced energy costs. When asked, the majority of economists stated that the likelihood that the economic slump would be less than presently anticipated rather than deeper was higher.
Regardless of how this is dressed up in the bank’s accompanying verbiage, a 25bp boost would be a rather substantial surprise for the markets and, in our opinion, would certainly cause a quite strong sell-off in the pound, according to Matthew Ryan, head of strategy at Ebury. At $1.2318, the pound remained unchanged versus the dollar. If the BoE underperforms and decides to make merely a 25 bp rise, as we anticipate, Unicredit analysts warned that the decision “could impact on sterling.” At 88.36 pence to the euro, sterling was down 0.2%. According to some experts, the euro has limited room to rise, even in the event that the European Central Bank adopts a hawkish stance on Thursday. As a result, a potential pound advance versus the euro would be more driven by risk sentiment than by a divergence in monetary policy.
“The risks are tilted to the upside for EUR/GBP given our baseline forecast for a hawkish Fed weighing on risk assets,” said Francesco Pesole, FX analyst at ING. “The pound tends to be more sensitive to global risk sentiment than the euro.” In IMF predictions released on Tuesday, Britain is the only other Group of Seven country to have had its economic growth prognosis for 2023 reduced. According to Ulrich Leuchtmann, head of forex and commodity research at Commerzbank, “it is far from certain whether it will turn out to be as bad as the IMF predicts or whether there will be a recession in other countries as well, and whether weak UK growth really will turn into a long-term problem.”
RAND SOUTH AFRICAN
Reuters: On Wednesday, as investors anticipated the U.S. Federal Reserve’s interest rate decision, which would indicate the end of its tightening cycle, the rand of South Africa rose versus a weaker dollar. The rand was trading at 17.1775 versus the dollar at 15:59 GMT, up 1.22% from the previous close. The dollar index, which compares the dollar to six other currencies, was down around 0.4% at 101.68. The Fed increased its target interest rate by 25 basis points, abandoning the swift increases employed to combat an inflationary rise last year in favor of a more gradual search for a stopping point. According to statistics released on Wednesday, South Africa’s new car sales increased 4.8% year over year in January. Separately, the Absa Purchasing Managers’ Index remained positive due to increases in business activity and inventories.
According to statistics released on Wednesday, South Africa’s new car sales increased 4.8% year over year in January. Separately, the Absa Purchasing Managers’ Index remained positive due to increases in business activity and inventories. The Top-40 and larger all-share indices on the Johannesburg Stock Exchange finished up around 0.4%. Bid Corporation increased by 6.57%, ranking among the top gainers, after the food service company said it anticipated a 49% increase in half-year earnings. After the miner claimed that better metal grades at its underground mines during the second quarter helped it reach production goals and mitigate the effects of continued power outages in South Africa and interruptions to the world’s supply chains, Harmony Gold finished 2.76% higher.
The government’s standard 2030 bond performed better in afternoon trades, with a 7 basis point decrease in yield to 9.605%.
WORLD MARKETS
Reuters: After Federal Reserve Chair Jerome Powell said that a “disinflationary” process was under way on Thursday, Asian equities surged and the dollar fell, bolstering risk appetite and optimism that the U.S. central bank would soon halt its string of monetary tightening. While Japan’s Nikkei gained 0.37%, MSCI’s largest index of Asia-Pacific equities outside of Japan increased by 0.84%. S&P/ASX 200 index for Australia increased by 0.37%. While the Hang Seng Index in Hong Kong increased by over 1%, Chinese equities were up by 0.11%. After a year of higher increases, the U.S. central bank announced an anticipated 25 basis point rise in interest rates and claimed to have made significant progress against excessive inflation. But officials anticipated that there would still be a need for “ongoing rises” in borrowing rates.
Nevertheless, the market saw Powell’s remarks at the press conference as being dovish. The S&P 500 and the Nasdaq closed significantly higher overnight as a result. Powell seemed to dismiss the improvement in financial circumstances as a worry at his press conference, according to Ali Hassan, portfolio manager & managing director at Thornburg Investment Management. This was a signal that the market could accept without feeling as if they were at odds with the Fed. The emphasis will now shift to the Thursday meetings of the European Central Bank and the Bank of England, as well as the expected course of interest rates adopted by those two institutions. The ECB has lately outperformed its rivals in the hawkishness quotient, and will probably do so again this week, according to Saxo Markets analysts. Given the uncertainty around market pricing and the potential for a split vote, they predicted that the BOE would be the most challenging.
Following Powell’s comments, the dollar plunged on the currency market. The U.S. dollar index, which compares the greenback to six major rivals, hit a new nine-month low of 100.80. It was at 100.98 last. Euro price rose by 0.2% to $1.1011. Sterling recently traded at $1.2372, down 0.03% on the day, while the yen gained 0.22% to 128.65 per dollar. The 10-year Treasury note rate increased by 1.5 basis points to 3.413%, while the 30-year Treasury bond yield increased by 1.3 basis points to 3.563%. The two-year U.S. Treasury yield, which often moves in lockstep with forecasts for interest rates, decreased 0.2 basis points to 4.108%. After touching a nine-month high of $1,957 per ounce earlier, spot gold gained 0.2% to $1,953.69 per ounce.
U.S. crude increased by 0.93% to $77.12 a barrel, while Brent was up 0.77% on the day at $83.4.
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