The dollar rose at the beginning of European trading on Thursday, maintaining a positive mood while traders “digested” the decisions of the Federal Reserve System.
At 03:00 eastern time (07:00 GMT), the dollar index, which tracks its exchange rate against a basket of 6 other currencies, was trading 0.1% higher at 105.030 after rising to a 20-year peak following the Fed meeting.
The US Federal Reserve raised interest rates by 75 basis points on Wednesday, marking the biggest rate hike since 1994, and pointed to further steady increases this year to combat historically high inflation.
Nevertheless, Fed Chairman Jerome Powell said at a corresponding press conference that “today’s 75 basis point rate hike is unusually large, and I don’t think such increases will occur often.”
Powell said that the conflict in Ukraine and the quarantine imposed in China due to the coronavirus will continue to disrupt supply chains and, consequently, inflationary pressures,” said Steven Innes, managing partner at SPI Asset Management. — Hinting at external factors, he has proven himself well in relation to risky assets, giving investors a grain of hope that unexpected movements of this size should not be expected to become commonplace
All attention is now turning to the latest economic data for recommendations, and data on housing construction and unemployment trends in the US will be released later today.
Now the Fed needs data that would play along with it, and so that inflation does not surprise again. If this happens, the 75 basis point rate hikes in July and September will be quickly overestimated,” Innes added. — But the risk that the market will move to expectations of a rate hike by 100 basis points seems to be eliminated at the moment
When making a decision on monetary policy, the Fed focuses on macroeconomic indicators. In May, the unemployment rate in the United States was 3.6% for the third month in a row, and the number of unemployed remained virtually unchanged and amounted to 6 million people, according to data from the Ministry of Labor of the country. These figures differ little from the values in February 2020 before the start of the pandemic, when the unemployment rate was 3.5%. This speaks in favor of tightening monetary policy.
At the same time, annual inflation in the United States in May increased by 8.6% year-on-year, although analysts had predicted 8.3%. This is the highest growth rate since December 1981. Core inflation, that is, excluding the increase in food and energy prices, was 6%. Experts predicted that it would slow down to 5.9%.
Since June 1, the Fed has been selling treasury bonds worth $30 billion and mortgage bonds worth $17.5 billion a month. In September, sales will be increased to $60 billion for treasury and $35 billion for mortgage securities.
EUR/USD fell 0.3% to 1.0411 after the European Central Bank announced a new purchase scheme aimed at ending the widening gap between the yield on German bonds and the yield on bonds of lower-rated countries such as Italy, which did not provide significant support to the single currency.
USD/JPY rose 0.5% to 134.49; at the same time, the yen was under strong pressure ahead of the Bank of Japan’s policy decision on Friday; at the same time, the central bank still adheres to its ultra-easy monetary policy, while the Fed sharply raises the rate.
GBP/USD fell 0.5% to 1.2113; at the same time, the Bank of England is expected to hold a fifth consecutive rate hike by 25 basis points later today, which will be something of a disappointment after the Fed’s move.
The Bank of England started tightening its monetary policy earlier than its peers, which potentially gave it the opportunity to act cautiously, but in April inflation reached 9% in the country and is projected to reach double digits this year, which is significantly higher than the bank’s target of 2%.
USD/CHF rose 0.4% to 0.9978, while the Swiss National Bank will also hold its meeting later on Thursday.
The benchmark interest rate in Switzerland has been -0.75% for more than 7 years, as the central bank has been trying to weaken its “overvalued” currency, and no changes are expected at this meeting. Nevertheless, the question of how long the Swiss National Bank will be able to resist the trend of joining the tightening of monetary policy to combat rising inflation remains controversial.
AUD/USD fell 0.3% to 0.6978, NZD/USD fell 0.4% to 0.6257, and USD/CNY fell 0.1% to 6.7050.