Inflation-fighting central banks will continue to dominate markets, BoE set to raise rates further

The political decisions of global central banks and their impact on risk appetite will remain crucial for exchange rates in the short term.

There was a tentative recovery in risk appetite on Wednesday and Wall Street posted gains after the Fed’s decision, but underlying conditions will continue to tighten as central banks raise rates.

Against this backdrop, risk conditions are likely to remain fragile, especially given the pace of Fed tightening, and equity markets will remain vulnerable to renewed selling pressure.

In this environment, currencies with weak fundamentals should generally remain vulnerable.

British Pound and US Dollar Exchange Rate Outlook

After heavy losses the day before, the pound got a significant correction on Wednesday as the currency was also oversold in the short term.

The exchange rate between the pound and the dollar (GBP/USD) rebounded strongly to 1.2200 before falling back below 1.2150 at the start of Europe on Thursday.

There was also an element of short hedging ahead of the Bank of England (BoE) policy decision as risk appetite tried to stabilize.

The BoE is expected to raise rates another 25 basis points to 1.25%, but there is a significant element of uncertainty given the divisions within the committee.

Forward guidance will be important for moves in the pound with volatile trading inevitable.

Global risk conditions will also be important for the British currency, with the underlying tightening of financial conditions also being a major headwind for the pound and a significant headwind to gains.

GBP/USD has room for further short cover, but any rally will always quickly attract sellers’ interest, especially with ongoing political concerns.

Euro (EUR) exchange rate today

The ECB held an emergency meeting on Wednesday with the central bank concerned about the sharp rise in peripheral bond yields.

The bank will seek to accelerate the development of a new tool to reduce the risks of fragmentation and also direct bond reinvestments towards the weakest economies.

The euro against the dollar (EUR/USD) briefly hit the 1.0500 level, but failed to sustain the gains and fell back below 1.0400 before settling around 1, 0420 Thursday.

Confidence in the Eurozone economy will remain fragile, especially given a further rise in gasoline prices to 3-month highs.

In this context, the EUR/USD will struggle to rise in the short term.

US Dollar (USD) Exchange Rate Outlook

The Federal Reserve announced a 75 basis point increase in interest rates to 1.75%, the largest increase in more than 30 years.

The bank continued to indicate that interest rates would be raised further in the short term with a further hike of 50 to 75 basis points in July.

The Fed had reported in the Wall Street Journal that a larger than expected rate hike was on the table and the dollar was unable to gain further support.

There was also a limited recovery in risk appetite, with bad news potentially priced in.

Given the overall yield trends, the dollar as a whole should be resilient, especially with global risk conditions likely to be fragile.

According to TD Securities, the Fed’s aggressive inflation fight will continue; “We remain of the view that the Committee wants to reach its long-term neutral key rate relatively quickly in the face of still robust demand and an unbalanced labor market. We expect them to do so with another 75 basis point rate hike next month.

He also expects this battle and the Fed’s stance to support the dollar; “We are likely seeing a slight reprieve from the USD, but it remains premature to strategically weaken the USD given that the outlook for the core is still troubling.”

Other currencies

Australian labor market data was stronger than expected with employment rising just over 60,000 for the month with unemployment held steady at 3.9%, keeping expectations of further rises steady. rate.

The exchange rate between the British pound and the Australian dollar (GBP/AUD) fell to a one-week low around 1.7315 before rising to 1.7350.

New Zealand GDP was weaker than expected with a decline of 0.2% in the first quarter. The exchange rate between the British pound and the New Zealand dollar (GBP/MZD) failed to hold above 1.9400 and stabilized around 1.9340.

The exchange rate between the pound and the yen (GBP/JPY) recovered to 163.80 before stabilizing at around 1.6300.

The exchange rate between the pound and the Swiss franc (GBP/CHF) held above 17-month lows at 1.2000 before the SNB policy decision and traded around 1.2080 .

The day to come

US data releases are unlikely to have a major impact unless there is a surge in jobless claims.

Central bank policy decisions will remain key with three policy decisions in the next 24 hours.

The consensus forecast is for the Bank of England to raise rates to 1.25%.

The Swiss National Bank is expected to keep interest rates at -0.75%, but markets expect the bank to head for higher rates.

The Bank of Japan will announce its latest policy decision overnight. No change in interest rates is expected, but there is speculation that the bank will raise the target for 10-year bond yields, especially given the decline in the yen which would lead to high volatility.

Further reaction to the Fed’s rate hike will be important for global risk conditions.

The evolution of gas prices will be significant for the euro zone markets and for the euro.