Dollar strengthened after Fed Chair Powell’s comments and risk appetite also dipped which pushed GBP/USD to the 1.3450 area.

Risk appetite held firm into Wednesday’s Federal Reserve policy decision. The Fed statement was in line with expectations, but there notably was hawkish rhetoric from Chair Powell with a warning of potential rate hikes at every meeting from March.

US yields moved higher following Powell’s comments with the 10-year yield near 1.85%. Wall Street equities reversed gains to post net losses. The mood soured in Asia on Thursday with significant losses across all major bourses as US futures dipped lower.

The dollar posted strong gains following Powell’s comments with 6-week highs. EUR/USD dipped to 2-month lows around 1.1210. Sterling was resilient but drifted lower with GBP/USD at 4-week lows around 1.3420.

The Bank of Canada left interest rates on hold which hampered the Canadian dollar but suggested a near-term rate hike was likely. Commodity currencies overall retreated sharply after Powell’s comments.

Narrow ranges prevailed ahead of Wednesday’s New York open with the Euro drifting lower amid Ukraine concerns and an underlying lack of yield support.

The US goods trade deficit widened to $101.0bn for December from $98.0bn the previous month and above consensus forecasts of $96.1bn. The growth in imports out-paced exports again and the 2021 deficit hit a record high of $1.08trn from $894bn the previous year.

Trading ranges remained narrow with EUR/USD settling around 1.1280 at the European close.

The Federal Reserve made no changes to interest rates with the Fed Funds rate held at 0.25%. The statement noted that the economy had continued to improve, but that the path of the economy continues to depend on the virus and risks to the outlook remain. It added that with inflation well above 2.0% and a strong labour market it would soon be appropriate to raise interest rates. The Fed will conclude asset buying by the beginning of March which reinforced expectations that there would be a rate hike at the March meeting. The dollar edged lower in an immediate reaction, although moves were limited.

Chair Powell reiterated that the economy no longer needed on-going high levels of monetary support given inflation and employment developments.  Powell added that there was plenty of room to raise interest rates given the strength of the labour market and he did not rule out raising rates at every meeting. He added that it was possible that the Fed could move faster than the previous tightening cycle and his rhetoric overall was notably and consistently hawkish.

Powell also warned that inflation was liable to be higher than expected and the overall tone triggered significant dollar gains as markets priced in a series of rate hikes. EUR/USD retreated to below 1.1250 and posted further losses on Monday with 2-month lows near 1.1210 and close to 19-month lows as the dollar advanced further.

There was little change in US Treasuries ahead of the New York open, but equities maintained a firmer tone during European trading which limited potential support for the Japanese currency and USD/JPY was able to post net gains to the 114.30 area.

Fed Chair Powell commented that there had been no decision on the timing or speed of balance-sheet reduction which maintained underlying uncertainty.

US Treasuries dipped sharply following Powell’s hawkish comments with the 10-year yield posing a significant increase. Higher yields underpinned the dollar, but Wall Street equities posted sharp losses which help protect the yen and USD/JPY gains were held to just above 114.50 with the yen resilient on the crosses.

US equity futures moved lower on Thursday and Asian equities were firmly on the defensive amid expectations of global monetary tightening.

The yen maintained a firm underlying tone on the crosses and USD/JPY was held around 114.65 with EUR/JPY around 128.60 as markets also monitored geo-political tensions.

The latest YouGov survey recorded an increase in the one-year inflation expectations to 4.8% from 4.0% previously which was double the long-term average and the highest reading since the survey started in 2006. The longer-term expectations index held at a 5-year high of 3.3%. The data is likely to maintain concerns within the Bank of England over the risk that expectations will move higher and increase upward pressure on wages.

Sterling held a firm tone during European trading as risk appetite maintained a firmer tone. EUR/GBP retreated to just below 0.8350, but GBP/USD hit selling interest above 1.3500. There were no substantive political developments during the day with markets waiting for the Gray report.

The dollar strengthened after Fed Chair Powell’s comments and risk appetite also dipped which pushed GBP/USD to the 1.3450 area. Expectations of Bank of England rate hikes were offset by stronger expectations of Fed rate increases and GBP/USD settled close to 2-month lows around 1.3430 on Thursday with GBP/EUR around 1.1975. Markets will continue to monitor political developments, although risk conditions are likely to have a more substantial currency impact.

Economic Calendar

Expected Previous
07:00 CHF Trade Balance(DEC, 2021) 5.230B 6.099B
07:00 German GfK Consumer Confidence (FEB) -7.8 -6.9
11:00 CBI Distributive Trades Survey(JAN) 13 8
13:30 USD Durable Goods Orders Ex Transportation(DEC, 2021) 0.60% 0.90%
13:30 USD Durable Goods Orders (M/M)(DEC, 2021) 2.50%
13:30 USD GDP (Annualized) 2.70% 2.30%
13:30 USD GDP Price Index (Q/Q) 5.90%
13:30 USD Initial Jobless Claims 260K 286K
13:30 USD Continuing Jobless Claims 1635K
15:00 USD Pending Home Sales (Y/Y)(DEC, 2020) 122.40%

*All rates shown are indicative of interbank rates and should only be used for indication purposes only. It is important to note that foreign exchange rates fluctuate and that rates may vary depending on the amount and the base currency that is purchased or sold. Rates are correct as of 8:00am UK time. CentralFX are not responsible for the rates shown.