The Australian Dollar Held Above $0.68, Today The Fed Will Make Its Last Decision Of The Year
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Dollar bears have come out of hibernation. After gaining 16% in the first 10 months of the year, the dollar index, which measures the dollar against a basket of currencies, lost 5% in November. It has since fallen another 1%, reflecting a smaller-than-expected increase in consumer prices in November.
Fed ahead
In currency markets, the dollar fell again after tumbling against a range of major currencies on Tuesday.
The dollar is also facing more headwinds. The Federal Reserve is expected to reduce the scale of future interest rate hikes, which would allow other central banks to close the interest rate gap that attracts investment to the United States. US interest rates, which are the lower bound on both government and corporate bond yields, range from 3.75% to 4%, which is well above rates in other major economies such as the Eurozone where the deposit rate is 1.5%, or Japan, where interest rates are actually negative.
Today the Fed will make its last decision of the year. Futures pricing shows markets expect the Fed will slow the pace of hikes. The latest rate hike is expected to raise rates by 50 bp this time.
Fed officials say interest rates will go up. They want investors to focus on trajectory, not pace, and are signaling that interest rates could peak above market-expected 4.8% and stay there for most of 2023. If the Fed sticks to the "higher for longer" mantra central banks in Europe, the UK and China will struggle to catch up given the volatile state of their economies.
EUR/USD
The EUR/USD benefited from the release of inflation data, breaking the level above 1.06.
The euro rose by 0.9% yesterday, and the pan-European Stoxx 600 index saw gains of 1.29%. However, the European Central Bank is also getting ready for a 50bps rate hike tomorrow.
In Europe, the ECB will announce its latest monetary policy decision tomorrow. Both the Fed and the ECB are expected to raise interest rates by 50 basis points, keeping the rate differential between them the same, but central banks may differ in their forecasts for the coming months. Differences in the forecasts of the two central banks for the coming months will determine where EUR/USD will trade in the short to medium term.
GBP/USD
Yesterday, GBP/USD opened the prospect of a move towards 1.2750 after breaking 1.2300. The pound rose by 0.82% against the dollar yesterday to reach a 6-month high. The upward price movement was due to newly released inflation data from the US.
Today, decisions on monetary policy will be announced by the Fed, and on Thursday, next to the ECB, the Bank of England. The Bank of England will have to contend with the biggest drop in living standards in history as the energy crisis, fiscal austerity and lack of growth eat into British household budgets.
After positive GDP data on Monday, UK Chancellor Jeremy Hunt warned that the economy could get worse before it got better. While yesterday's employment figures were largely positive, they indicated a slowdown in employment as firms prepare for a tough start to 2023.
The Bank of England released its Financial Stability Report yesterday, warning that 2023 will be a tough year for British households due to a combination of falling real incomes, rising mortgage costs and higher unemployment.
AUD/USD
The Aussie Pair benefited from lower-than-expected US inflation. Yesterday, the pair was trading low in daily levels in the 0.6733-0.6793 range. Today, the quotes are higher above 0.68, oscillating close to the highest levels in three months
The lack of events on the Australian market makes the AUD/USD pair dependent on reports and events from America.
USD/JPY
The Japanese yen held its recent advance to below 136 per dollar. Yesterday, the USD/JPY traded above 137. The decline will occur after the release of US inflation data. The drop took place from the level of 137.2760 to the level of 135.3800. Currently, the pair is trading at a price of 135.0040.
Source: finance.yahoo.com, investing.com, dailyfx.com
