Major Forex Pairs in Focus: Dollar Continues to Fall After Fed Meeting, Market Bets Bank of England Will Raise Rates by 25bps

2023-03-23 17:02:35

Here's what investors need to know for Thursday, March 23:

The greenback suffered heavy losses against its rivals after the U.S. Federal Reserve announced policy on Wednesday. The dollar continued to weaken early Thursday. The Swiss National Bank (SNB) and the Bank of England (BOE) will announce interest rate decisions at a later date. The U.S. economic calendar will include weekly jobless claims, the Chicago Fed's national activity index and February new home sales data. Finally, Eurostat will release its preliminary consumer confidence index for March.

As expected, the Fed raised its policy rate by 25 basis points to a range of 4.75-5% after its March policy meeting. In its policy statement, the Fed dropped reference to "continued rate hikes" and said some additional policy firmness might be appropriate. In addition, the revised Summary of Economic Forecasts showed that the terminal interest rate forecast remained unchanged at 5.1%. Regarding the SVB collapse and its impact, FOMC Chairman Jerome Powell noted that they may see tighter funding conditions, noting that this would help them cool the economy. Finally, Powell told reporters that they haven't talked about making any changes to the implementation of the balance sheet.

Meanwhile, U.S. Treasury Secretary Janet Yellen told the Senate Appropriations Committee on Wednesday that they were not considering or discussing matters related to blank insurance or guarantees on bank assets.

After Tuesday's rally, the benchmark 10-year U.S. Treasury yield turned south and was down nearly 5% on Wednesday. In turn, the U.S. dollar index came under bearish pressure late Wednesday and extended losses early Thursday, falling below 102.00 for the first time since early February. Wall Street's main indexes fell sharply and plunged deep into negative territory on Wednesday, but U.S. stock futures rose between 0.5% and 0.8% in early trade on Thursday.

EUR/USD

Following Wednesday's impressive gains, EUR/USD extended the Fed-inspired rally on Thursday, stretching higher during the Asian session, posting its sixth straight day of gains and refreshing a seven-week high at 1.0930.

The dollar fell sharply, boosting the euro/dollar up. Markets are viewing the decision as a "dovish rate hike." U.S. stocks on Wall Street hit new highs. The improvement in risk sentiment weighed on the dollar.

Madis Muller, a member of the European Central Bank's Governing Council, said on Thursday, "The European Central Bank should raise interest rates slightly. Inflation is a bigger problem than rising borrowing costs. It is crucial for us to get inflation under control."

Economists at Danske Bank still expect the pair to fall in the coming months. "We still see EUR/USD falling to 1.02 in six months. Relative interest rates favored the euro after a more hawkish signal from the European Central Bank last week, but a sustained rise in EUR/USD may support another rise in commodity prices and inflation expectations, so it will prevent inflation from returning to 2%.”

GBP/USD

GBP/USD has gathered bullish momentum, taking advantage of the broad-based weakness in the greenback.

The Bank of England is expected to raise its key interest rate by 25 basis points to 4.25% following the release of torrid UK inflation data on Wednesday. With there will be no press conference, the split in the vote could drive the pound's performance against its main rival.

GBP/USD hit a fresh daily high of 1.2330 in early European trading on Thursday. Further losses in the U.S. dollar against a basket of currencies supported gains in sterling as the Fed approached a tightening phase. Also supporting the pound was rising hawkish bets on the Bank of England following a surprise rise in UK inflation.

Economists at Bank of America expect the Bank of England to raise interest rates by 25 basis points today, which is dovish.

The U.S. dollar index is struggling to stay above 102 and is expected to extend losses as the focus shifts to risk assets. S&P 500 futures rebounded sharply, suggesting a rise in risk appetite among market participants.

GBP/USD is in an ascending channel on the 4-hour chart, with every pullback seen as a buying opportunity. Sterling is heading towards horizontal resistance provided by the December 13 high of 1.2444. The 20EMA at 1.2245 provides a cushion for GBP bulls.

The RSI moved from the bearish zone of 20.00-60.00 to the bullish zone of 40.00-80.00, indicating further gains ahead.

USD/JPY

USD/JPY came under renewed bearish pressure after the Fed event and fell below 131.00 to end at 131.36,

down 0.85%.

During the early European session on Thursday, USD/JPY rebounded to near 130.80 to narrow the intraday losses. The pair rebounded from a six-week low hit earlier in the day as traders looked for more clues to prolong the rally triggered by the Federal Reserve's (FED) interest rate decision. Adding strength to the corrective rally could be a denial of the financial crisis by key policymakers and upbeat details in Japan's Reuters Tankan poll.

"Big Japanese manufacturers remained pessimistic about business conditions in March for the third straight month," a closely watched Reuters Tankan survey showed earlier on Thursday. "The sentiment index among large manufacturers was negative 3, according to the March 8-17 survey, slightly higher than the previous month's negative 5," Reuters reported.

U.S. 10-year and 2-year Treasury yields continued to be under pressure around 3.46% and 3.89%, after recording their biggest drop in a week, putting downward pressure on the dollar against the yen.

Looking ahead, the Bank of England's interest rate decision and the Swiss National Bank's interest rate decision may affect USD/JPY, and the reaction of the two central bankers to the banking crisis will affect prices. However, against the backdrop of the BOJ's hawkish bias, the main focus will be Friday's national consumer price index for February.

USD/CHF continued to push lower after Wednesday's losses and was last seen trading below 0.9150. The SNB is widely expected to raise its policy rate by 50 basis points to 1.5%.

AUD/USD retreated from highs on Wednesday. It once rose 1.38% in intraday trading, reaching a new high of nearly two weeks to 0.6758. However, it fell back in late trading and closed at 0.6683, narrowing the increase to 0.27%. Worries about the banking industry in Europe and the United States have picked up, dragging down the performance of European and American stock markets, and also dragging down the Australian dollar. The trend of the New Zealand dollar is similar to that of the Australian dollar. It once rose 1.45% to 0.6282 in the intraday session, and then fell back to 0.6219 in late trading, narrowing the increase to 0.45%.

Spot gold prices rose more than 1% on Wednesday, taking advantage of plunging U.S. yields. London gold retained its bullish momentum, trading higher on the day near $1,980.

Bitcoin turned negative late Wednesday, losing more than 3 percent. However, bitcoin found its footing early Thursday, starting its climb towards $28,000. Ethereum rose 1 percent early Thursday to trade just above $1,750 after falling nearly 4 percent on Wednesday.

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