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US Federal Reserve issues dovish message

Although the US Federal Reserve did as expected and lifted the US base rate by 25 basis points yesterday, the US dollar weakened because of what was said, rather than what was done. The US base rate is up to 4.5%, the highest in over 15 years but Chairman of the Fed, Jerome Powell talked about having turned the corner on inflation and that was taken as a signal that yields on US bonds would stop rising. Hence the USD sell off. The GBPUSD rate shot up above $1.24 at one stage before settling back to this morning’s $1.2390 and the EURUSD  rate is above $1.10 this morning for the first time since April 2022. The next big hurdle for the USD is Friday’s employment data but further USD weakness is a real possibility.

Euro gains from USD weakness ahead of ECB rate hike

All of the stories are about central banks this week. Having seen the US Federal Reserve lift their base rate but signal a slowdown or maybe a halt to further rises, it is the European Central Bank’s turn today. There is every chance the ECB will follow a similar path to US Fed but they are perhaps one step behind. The markets are expecting a 50 basis point hike to bring the eurozone base rate up to 3%. That would be its highest level since December 2008. However, we are expecting the ECB to talk about the end of their interest rate hiking cycle, although that is likely to be couched in central-bank-speak so it will need deciphering. The euro has significantly benefitted overnight from the weakness in the US dollar. The GBPEUR rate is down two cents from the start of the week to this morning’s €1.1250 and the EURUSD rate is up to a 10 month high at $1.1000. Where these rates will be by the end of today is all down to the ECB and the Bank of England, which will also make a rate announcement today.

BOE joins the central bank melee

Before the ECB gets its chance, the Bank of England will make its announcement about the UK base rate. A rise of 50 basis points to 4.0% is expected and that would make the embattled pound reasonably attractive to buyers. Assuming the BOE delivers on that expectations, the devil will be in the detail of the statement that accompanies the rate decision. Any GBP buying interest rests on the expectation of further hikes. If that isn’t in the hints within the statement, the pound will find it hard to attract buyers. Hang on tight, this will be a very bumpy ride.

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