. US Dollar cautious amid Fed tightening - 20 April 2023

US Dollar cautious amid Fed tightening – 20 April 2023

US Dollar cautious amid Fed tightening – 20 April 2023

20 Apr 2023

Central bank meetings are in focus as the dollar remains mostly unchanged.

  • On Thursday, the US dollar traded cautiously in early European trade as the Federal Reserve’s expected tightening of monetary policy next month led to subdued market sentiment. The Dollar Index, which tracks the greenback against a basket of six other currencies, remained mostly flat at 101.662, after gaining 0.3% on Wednesday.
  •  The US central bank’s willingness to act against problematic inflation was reiterated by Federal Reserve Bank of New York President John Williams, while Morgan Stanley’s strong Q1 earnings eased concerns over the health of the US banking sector. Meanwhile, the European market showed a different strategy, with inflation remaining an issue, particularly in the UK. The release of minutes from the last European Central Bank meeting is expected to provide clues about future hikes
  • The differing approaches across the Atlantic have led to the euro and sterling hitting multi-month highs. The Bank of England is expected to increase rates by 25 basis points in May, with investors anticipating a peak of 5% by September.

    Investors are closely monitoring central bank meetings in the coming weeks, which will likely determine market sentiment going forward. While the Fed is widely expected to deliver a final 25-basis-point rate increase in May, the debate over whether the central bank will hold rates steady or deliver cuts towards the end of 2023 remains open. In Europe, data released on Wednesday showed that inflation remains an issue, particularly in the UK, which suggests more interest rate hikes lie ahead.

The EUR/USD currency pair edged higher on Thursday to 1.0956, with German producer prices falling 2.6% on the month in March but remaining up 7.5% on an annual basis. Analysts at ING note that the market has already priced in 25bp increases by both central banks in May, leading to lower volatility in rate expectations and favoring a quieter FX environment.

Elsewhere, the GBP/USD currency pair retraced its strong gains seen on Wednesday after consumer price data showed that Britain was the only country in Western Europe with double-digit inflation in March, falling 0.1% to 1.2430. The AUD/USD currency pair also fell 0.1% to 0.6709, while the USD/JPY currency pair edged higher to 134.72, and the NZD/USD currency pair fell 0.5% to 0.6169 after New Zealand’s CPI turned out lower than expected.