Dollar higher after Fed hike; ECB, BoE meetings loom large

By Peter Nurse

Investing.com - The U.S. dollar edged higher in early European trade Thursday, climbing after the Federal Reserve raised interest rates overnight and signaled more hikes to come, although gains are limited ahead of meetings by the European Central Bank and the Bank of England.

At 03:15 ET (08:15 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, rose 0.3% to 103.680, edging above the six-month low hit in the previous session.

The U.S. central bank raised interest rates by a half a percentage point on Wednesday, as widely expected, but also provided a hawkish message while expressing its determination to tame inflation, pointing to further hikes and keeping rates high for longer than earlier hoped.

“We still have some ways to go,” Fed Chair Jerome Powell said on Wednesday, while indicating that rates were likely to peak above 5%. “We will stay the course until the job is done.”

While the dollar has moved higher, its gains have not been substantial as the market has doubts about the long-term strength of the U.S. economy, with traders wary that the central bank could eventually end up cutting interest rates next year as inflation continues to head lower and as the economy falters.

Fed funds futures show that markets are expecting U.S. rates to peak just under 5% by May next year, lower than what the Fed has guided.

Also prompting caution Thursday are the rate decisions by the Bank of England and the European Central Bank later Thursday, with both central banks also expected to deliver a 50 basis point rate hike.

EUR/USD fell 0.4% to 1.0635, with French harmonized CPI confirmed rising 0.4% on the month in November, a smaller rise than the 0.5% expected, suggesting inflationary pressures are showing signs of abating in the Eurozone’s second-largest economy.

“The ECB could easily decide in favor of a smaller 50bp rate hike, which is the consensus call and more in line with what the market is pricing,” said analysts at Nordea, in a note. “Such an increase would likely be coupled with a more aggressive QT decision, meaning the process could start already in late Q1 or early Q2 2023.”

GBP/USD fell 0.5% to 1.2361, with inflation also starting to decelerate in the U.K., judging from Tuesday’s November reading, with the annual number falling to 10.7% from 11.1% in October.

USD/JPY rose 0.6% to 136.22, after data showed the country’s trade deficit shrank less than expected in November, piling more pressure on the economy.

The risk-sensitive AUD/USD fell 0.9% to 0.6799, while USD/CNY rose 0.2% to 6.9644, with the Chinese yuan hit by data showing both industrial production and retail sales sank below expectations in November, hampered by COVID-related disruptions.