The US dollar has fallen to its lowest level in over nine months in early European trading following the Federal Reserve’s latest interest rate decisions and guidance, which suggest the end of the current policy tightening cycle is in sight.
In a press conference, Fed Chair Jerome Powell stated that “the disinflationary process has started,” indicating that the central bank could soon move to cut interest rates. However, Powell also noted that he does not expect such a move to occur this year. Despite this, the foreign exchange and bond markets appear to anticipate an upcoming rate cut.
Paul Donovan, chief economist with UBS Global Wealth Management, believes that history is on the side of the markets. In three of the Fed’s past four tightening cycles, rates were cut within six months of reaching their peak. Donovan predicts that the peak in this cycle will occur around the end of the first quarter of this year.
By 03:00 ET (08:00 GMT), the Dollar Index, which tracks the greenback against a basket of advanced economy currencies, had dropped to 100.90, down 0.1% on the day. Earlier, it had dipped to as low as 100.675. So far this year, the dollar has lost around 2.3% as traders bet on the interest rate differentials between the dollar and other G10 currencies narrowing.
The Bank of England and the European Central Bank are expected to raise their key rates by 50 basis points each later on Thursday. If this happens, the Bank of England’s Bank rate will reach 4.0%, while the ECB’s deposit rate will rise to 3.0%. However, both banks may face opposition to such a large step due to the weak state of the Eurozone and British economies. Eurozone inflation fell more than anticipated in January, while household spending and borrowing slowed sharply in the UK at the end of last year. Both banks will face a communication challenge later in the day.
The Bank of England’s decisions are scheduled for release at 07:00 ET, while the ECB’s are due at 08:15 ET. Bank of England Governor Andrew Bailey will speak at 09:15 ET, while the ECB’s press conference will start at 08:45 ET.
In other central bank news, the Czech National Bank is expected to maintain its key rate at 7%. This reinforces the trend among central banks that moved earlier than the Fed to rein in inflation, as many have hit a plateau in rates. On Wednesday, Brazil left its key rate unchanged for the fifth consecutive month. However, the Egyptian central bank is set to raise rates again to over 17% as it grapples with the repercussions of last year’s energy and food price shocks.
In summary, the US dollar is currently experiencing a nine-month low due to the Federal Reserve’s latest interest rate decisions and guidance. While Powell indicated that interest rates could be cut in the near future, he does not expect this to occur this year. Meanwhile, the Bank of England and the European Central Bank are expected to raise their key rates by 50 basis points each, which may present communication challenges due to the weak state of the economies. Other central banks are also grappling with inflation, with some leaving key rates unchanged and others raising them.