FX Rate News

The dollar was firm in Asia on Friday after hotter-than-expected U.S. inflation and hawkish comments from a Federal Reserve official unleashed a wave of bets on aggressive rate hikes, though similar pressures worldwide kept a lid on gains.

Thursday data showed U.S. consumer prices up 7.5% year-on-year in January, a fourth straight month above 6% and slightly higher than economists’ forecasts for a 7.3% rise.

After that, St. Louis Fed President James Bullard told Bloomberg he’d like to see 100 basis points of hikes by July.

Treasury yields leapt and the dollar jumped to a five-week high of 116.34 yen during volatile overnight trade.

The greenback oscillated against other currencies before turning broadly firmer early in the Asia session. The euro was last down 0.2% at $1.1400 and the Australian and New Zealand dollars each dropped about 0.3% in morning trade.

Rates futures have shifted to price a better-than-even chance of a 50 bp hike next month and more than 160 bps of tightening by the end of the year.

“There is definitely a feeling of urgency at least for some (Fed) members,” said Commonwealth Bank of Australia strategist Kim Mundy in Sydney.

“But the Fed isn’t the only central bank facing this inflation conundrum,” she said, and a hawkish pivot at the European Central Bank last week in particular can cap dollar gains by removing a headwind for the euro.

Bond markets are braced for more hawkishness when the ECB updates its economic projections next month and swaps pricing indicates a nearly 30% chance the Bank of England raises rates by 50 bps next month.

Hike expectations held sterling fairly steady and it was last at $1.3541.

Even the hitherto dovish Reserve Bank of Australia Governor Philip Lowe on Friday said if the economy tracks forecasts, hikes could be on the agenda this year.

The Aussie dollar, at $0.7145, is on track for a weekly rise of nearly 1% despite the dollar’s Friday strength.

The New Zealand dollar, last at $0.6658 is also heading for a second consecutive weekly gain.

It is the outliers that have been punished, with the Swedish crown dunked 2% after the central bank stressed that surging inflation is temporary overnight and kept policy steady.

The Bank of Japan also affirmed its resolve to anchor borrowing costs and yields on Thursday, promising to buy an unlimited amount of 10-year bonds at 0.25% after several days of selling pressure in Japan’s bond market.

The yen fell to a more-than-three-month low on the euro overnight. The U.S. dollar index was a tad stronger at 95.846 on Friday, just below its 50-day moving average.

The euro edged up on Wednesday but was off Friday’s three-week high, as traders looked for clues as to when the European Central Bank will hike interest rates.

The dollar was little changed, a day before the release of U.S. consumer price data that may offer new indications about the pace of the Federal Reserve’s monetary tightening.

Investors have been revising their forecasts for ECB rate hikes after the bank caught them off guard last week, with President Christine Lagarde flagging for the first time that monetary tightening was a possibility.

Seeking to temper investors’ growing expectations for aggressive action, Lagarde then said on Monday there was no need for extensive tightening.

However, Bundesbank President Joachim Nagel said in an interview to German newspaper Die Zeit on Wednesday that the ECB could raise interest rates this year as inflation was proving to be high for longer than expected.

“We are revising our ECB key rate forecast to reflect last week’s hawkish shift by ECB President Christine Lagarde,” said UniCredit’s Marco Valli, Global Head of Research and Luca Cazzulani, Co-Head of Strategy Research.

They now expect a 25 basis point rate hike in the last quarter of the year and one early in 2023, compared to none previously. That could give limited support to the euro, they said, as policy-rate bets remained in favour of the U.S. dollar.

Money markets are pricing in a 10 bps ECB rate hike in June and a 50 bps rate hike by December.

Markets are also pricing in a 75% chance of a 25 or 50 bps Fed hike in March, according to CME’s FedWatch Tool.

Economists polled by Reuters predicted that U.S. inflation data due on Thursday would show that consumer prices had climbed 7.3% year-on-year in January.

“We expect the (U.S. inflation) data to support expectations of the Fed being hawkish,” said Jens Nærvig Pedersen, FX and rates Strategy chief analyst at Danske Bank.

The euro edged up 0.2% to $1.1437 at 1210 GMT, after touching $1.1483 on Friday, its highest level since Jan. 14.

The dollar index, which gauges the greenback against six major peers including the euro, was down 0.16% at 95.435, after bouncing off a 2-1/2-week low of 95.136 reached Friday.

A resurgent euro was hunkered just short of strong resistance levels on Tuesday as traders awaited U.S. inflation data due later in the week, wary it could trigger gains in the dollar.

The common currency leapt 2.7% last week after a hawkish shift in tone at the European Central Bank. It has held gains but has been unable to beat resistance around $1.1483 even as European bond yields have leapt and last bought $1.1441.

Stunningly strong U.S. labor data last week has put extra focus on inflation — forecast at a four-decade high 7.3% — in the lead up to March’s Federal Reserve meeting.

Futures markets are pricing an almost 1-in-3 chance of a 50 basis point rate rise and the prospect of aggressive hikes has been supporting the dollar.

“The surprise beat by the non-farm payroll numbers (which we were warned by Fed officials and the White House would be very weak due to omicron) leaves the Fed in an unexpected territory,” said NatWest Markets rates strategist Jan Nevruzi.

“The CPI will be critical on how the narrative develops until the March (meeting),” he said, though adding that barring a big surprise, March will probably bring only a 25 basis points hike.

The dollar crept 0.1% higher on the yen in early Asia trade to 115.22 and the U.S. dollar index hovered at 95.425.

Overnight bitcoin and the Australian dollar posted gains as equity markets cautiously rallied in Europe. The Aussie rose about 0.7% and was last at $0.7130, just shy of resistance around its 50-day moving average of $0.7163.

Bitcoin punched through its 50-day average to top $44,000 for the first time in nearly a month on Monday and is up more than 17% in four sessions.

The New Zealand dollar held a small overnight gain at $0.6642. Sterling was steady at $1.3538.

A quiet data calendar awaits on Tuesday, with a U.S. small business survey due later in the day. U.S. inflation data is due on Thursday.

The dollar was carrying a couple of bruises on Wednesday as Federal Reserve officials played down the chance of a half point rate hike in March and a rally in global equity markets tarnished some of its safe haven allure.

Stellar results from Alphabet after the bell saw that stock surge 7% and lift Wall Street futures, benefiting risk sensitive currencies including the Australian and New Zealand dollars.

The euro looked steadier at $1.1270, having risen 0.3% overnight and further away from last week’s 20-month trough at $1.1122. A break above $1.2300 resistance would help counter the recent bearish trend.

The dollar was back at 114.70 yen, after dropping 0.4% overnight and away from last week’s top at 115.68 which now marks major resistance. Still, it remains comfortably above key support around 113.47.

Reflecting that pullback, the dollar index eased to 96.272 and off its recent 19-month high of 97.441.

The euro got a lift from rising EU yields, with German 10-year yields hitting their highest since mid-2019 after lofty inflation readings stoked speculation the European Central Bank might have to tighten early.

“A surprisingly high inflation print in Germany has driven another leg up in euro-zone rate expectations, and while we don’t expect a major shift at the ECB policy meeting on Thursday, the direction of travel appears clear,” said Jonas Goltermann, a senior market economist at Capital Economics.

Likewise, British 10-year yields reached levels last seen in early 2019 ahead of an expected rate hike from the Bank of England this week.

That saw the pound push up at $1.3522 after three sessions of gains.

All this means the Fed is not the only hawkish central bank in town, restraining the dollar. Indeed, Fed officials have been pushing back against market talk they might hike by 50 basis points in March.

St. Louis Fed President James Bullard, a noted hawk, on Tuesday said he would argue for rate rises in March, May and June, but did not favour a half-point move.

Capital Economics’ Goltermann argued the market was still underestimating how high U.S. rate would have to go to rein in inflation.

Fed fund futures imply a peak around 1.75-2.0% which would be very low by historical standards and would likely still leave real rates in negative territory
“We think the terminal rate in the U.S. currently discounted in money markets is too low, both in absolute terms and relative to equivalent rates elsewhere,” he added.

“This is the key reason why we think the greenback will eventually resume its rise.”

The Australian dollar slumped on Tuesday after the Reserve Bank of Australia vowed to remain patient about raising interest rates, even in the face of the hottest inflation since 2014.

The U.S. dollar nursed its wounds following its biggest drop in nearly three weeks against major peers overnight, as Federal Reserve policymakers allayed investor fears of a very rapid tightening of monetary policy.

The Australian dollar sank as much as 0.52% and was last down 0.47% at $0.7036, retracing nearly half of Monday’s 1.06% rally, which was its biggest since early June.

ADVERTISING

Expectations had been building for RBA Governor Philip Lowe to capitulate on his long-held contention that a rate hike in 2022 was unlikely, with inflation printing hot and the labor market strengthening.

But while the central bank announced an end to its bond-buying stimulus, as widely expected, it said that was not a signal for near-term rate increases, and it was prepared to be patient while monitoring price pressures.

“We thought the RBA would be dovish, and that’s what they’ve delivered,” said Commonwealth Bank of Australia strategist Joseph Capurso.

“The RBA is saying it’s different from the Fed,” which aims to end its quantitative easing program in March, when it is also expected to start raising rates.

Meanwhile, the U.S. dollar index which measures the greenback against six rivals, not including the Aussie – was almost unchanged at 96.667 following a 0.59% tumble in the previous session.

The index hit an almost 19-month high of 97.441 at the end of last week, as investors pondered chances the Fed could raise rates by 50 basis points at its March meeting.

Overnight though, a chorus of Fed officials backed a lift-off in rates next month, but spoke cautiously about what might follow.

The U.S. Treasury’s top economist also commented on Monday that inflationary pressures should ease this year due to weaker demand for goods, easing supply bottlenecks and a receding coronavirus pandemic.

“Recent Fed remarks appeared to push back on the odds of a 50bp rate hike in March,” putting the focus on economic data this week for clues on the pace of policy tightening, including the closely watched monthly payrolls report on Friday, TD Securities strategists wrote in a note.

U.S. payrolls are forecast to show a gain of 153,000 jobs for January, down from 199,000 in December, with the unemployment rate holding steady at 3.9%, according to a Reuters poll.

Money markets have priced in a quarter-point rise for March, and four more by year-end.

The Bank of England holds its policy meeting on Thursday, with a Reuters poll predicting a second rate hike in less than two months after UK inflation jumped to its highest in nearly 30 years.

The European Central Bank also meets on Thursday. While no policy change is expected, analysts said the Fed’s looming rate hikes will narrow the ECB’s window for action.

The euro was largely unchanged at $1.1232, following a 0.80% jump on Monday.

Sterling was also little changed at $1.34395 after gaining 0.33% in the previous session.

The greenback slipped 0.15% to 114.97 yen as it continued to ease back after reaching a nearly three-week high at 115.68 on Friday.

Trading in Asian hours may be thin and moves more volatile, with several markets on holiday for the Lunar New Year.

The dollar fluctuated but remained rangebound on Thursday as this week’s upward trajectory of U.S. Treasury yields took a breather.

While the dollar initially edged lower following the release of disappointing economic data, the greenback reversed its losses after benchmark Treasury yields partially recovered in the wake of a 10-year TIPS auction which showed soft foreign demand for the notes.

Against a basket of world currencies, the dollar was last up 0.13%.

U.S. 10-year note yields were at 1.8325%, off their two-year high of 1.902% reached on Wednesday.

“While yields are softer, they’re still at elevated levels, and the dollar continues to draw support ahead of next week’s Fed meeting,” said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington. “We’ve seen ebbs and flows this month, but the underlying fundamentals remain bullish for the dollar on the view that the Fed is going to adopt a more hawkish policy stance going forward.”

The benchmark yield’s advance has been driven by market expectations that the U.S. Federal reserve will tighten monetary policy at a faster pace than previously anticipated. Fed funds futures have fully priced in a rate hike in March and a total of four in 2022.

The central bank’s Federal Open Markets Committee (FOMC) is expected to convene its two-day monetary policy meeting on Tuesday, at the conclusion of which market participants will closely parse the committee’s statement regarding the tightening timeline.

“Currencies are sticking to the range, waiting on central banks next week,” Manimbo said, adding that “market expectations have arguably become overly aggressive with respect to hawkish Fed policy.”

The Euro was last at $1.1313, below an earlier high of $1.1369.

The pound was 0.03% higher at $1.3615 and the yen was nominally lower at 114.14 per dollar.

The Aussie firmed 0.41% to $0.7241, extending advances from the previous day, and the Canadian dollar reversed earlier gains, with one U.S. dollar worth C$1.2474.

The Norwegian crown fell after the central bank voted to keep interest rates on hold at 0.5% and said it was on track for an interest rate hike in March.

The crown was last down 0.16% against the dollar.

Among cryptocurrencies, bitcoin was most recently up 3.0% at $42,916, while smaller rival ether gained 4.3% to $3,215.

The dollar held near a weekly high on Wednesday after a surge in U.S. yields resulted in sharp gains this week against the euro amid growing bets that the Federal Reserve will raise interest rates.

Sterling edged higher after data showed British inflation rose 5.4% in December, to its highest level in 30 years, raising rate hike expectations. Talks of a leadership challenge to Prime Minister Boris Johnson kept the pound in check.

The two-year gilt yield rose to 0.958% in early trade, its highest level since March 2018.

Ambrose Crofton, Global Market Strategist at JP Morgan Asset Management, said he expected the Bank of England to raise interest rates by 25 basis points in February.

“The strength of the labor market will give the Bank of England the confidence to continue to remove support for the economy as it looks to get a better handle on inflation,” he said.

In the meantime, the dollar has been boosted by U.S. Treasury yields rising further ahead of next week’s Federal Reserve policy meeting.

Ten-year Treasury yields inched up on Wednesday to touch a new two-year high of 1.9%.

Markets expect the Fed to raise interest rates amid a “stable” labor market and rising inflation, said Moritz Paysen, FX trader at Berenberg.

“It is not a question of if, but how quickly and strongly interest rates will be raised,” he said.

“At the same time, the impression is growing that the ECB (European Central Bank) continues to take its time to get a grip on inflation in the euro zone. This is another argument currently on the market that is helping the U.S. dollar to regain its strength,” he said.

The euro rose 0.1%, back on its 50-day moving average at $1.1340 after the previous day’s sharpest daily drop in a month.

The pound was up 0.25% at $1.3632. Against the euro , it rose 0.2% to 83.14 pence, its highest since February 2020.

The overall result was that the U.S. dollar index , which measures the greenback against six major peers, was 0.1% lower at 95.601.

The dollar headed for its largest weekly fall in eight months on Friday as investors trimmed long positions and deemed, for now, that several U.S. rate hikes this year are fully priced in.

In a week where data showed U.S. inflation at its hottest since the early 1980s, selling has forced the greenback through key support against the euro in particular and traders seem content to lighten their bets until a clearer trend emerges.

The dollar index is down about 0.9% for the week, on course for its largest weekly percentage fall since last May and set to halt a rally that has lasted about six months. The index last held at 94.849 in quiet Asia trade.

The euro is up more than 0.8% for the week so far, and has punched out of a range it held since late November. At $1.1457 it doesn’t face strong chart resistance until $1.1525.

The yen has rallied 1% over the week, and pushed back through 115 to the dollar, last holding at 114.13.

The moves have come while U.S. interest rate futures have all but locked in four hikes this year. But longer-end yields have fallen slightly on hawkish comments from Federal Reserve officials about reducing the bank’s balance sheet.

“Investors appear to be signaling that ending quantitative easing, hiking rates four times and commencing quantitative tightening all in the space of nine months is so aggressive that it will limit the scope for hikes further out,” said Derek Halpenny, head of global markets research at MUFG.

“It has in fact reinforced the belief that peak Fed funds will be below 2%,” Halpenny said in a note to clients.

“What can change this? We will need to see data on the economy that convinces the market of stronger growth. That could see thinking on the terminal fed funds rate shift higher. That would be the catalyst for renewed dollar strength.”

The Antipodean currencies have also been roused from their ranges and will have traders looking closely at labor and inflation data in both countries this month for anything that might prompt further shifts in central bank rhetoric.

The New Zealand dollar is up 1.3% for the week so far and is above its 50-day moving average at $0.6861. The Aussie briefly broke above stubborn resistance around $0.7276 this week, but retreated to that level on Friday.

“Further evidence of strength in the labor market will trigger expectations … for a potential positive shift in Reserve Bank of Australia rhetoric which will underpin the outlook for the AUD,” said Rabobank FX strategist Jane Foley.

“We expect AUD/USD to push higher to $0.74 in H2 2022.”

Sterling has been forging ahead, too, defying a political crisis threatening Prime Minister Boris Johnson’s position on confidence that Britain’s economy can withstand a wave of Covid-19 infections and that rate hikes could begin next month.

The pound traded above its 200-day moving average on Thursday and is heading for a fourth consecutive weekly gain of more than 0.5%. It last bought $1.3707.

In Asia on Friday the Bank of Korea raised its benchmark interest rate by 25 basis points to 1.25%, as expected, and the South Korean won looked to hang on to a weekly rise of about 0.8%.

China’s yuan, on the other hand, has had its gains on the dollar capped by growing expectations of policy easing to soften the landing of a slowing economy. Trade data is due around 0200 GMT.

Other notable moves in overnight trade included the Canadian dollar’s retreat from a two-month high as oil prices eased and a rise in the safe-haven Swiss franc to a ten-week peak of 0.9093 per dollar.

The dollar steadied above almost two-month lows against its major peers on Wednesday, ahead of data expected to show a fresh surge in U.S inflation that could seal the case for an early rise in interest rates.

Federal Reserve Chair Jerome Powell on Tuesday gave no clear indication that the Fed was in a rush to speed up plans for tightening monetary policy, putting some downward pressure on the greenback which has benefited from U.S. rate-hike expectations in recent weeks.

And the currency started to nudge higher again as the December U.S. consumer price index (CPI), due out at 1330 GMT, loomed.

The dollar index was last trading at 95.643, steady on the day above the 95.533 low hit during the Asian session, the lowest since Nov. 18.

Headline U.S. CPI is forecast at a red-hot 7% on a year-on-year basis, which would be the highest annual CPI number since 1982.

ING currency strategist Francesco Pesole said since an inflation print above 7% is expected by markets, the immediate reaction in currency markets should be contained.

“At the same time, it should allow consolidation for a floor below the dollar in the near term – further cementing expectations for three Fed hikes and leaving the door open to speculate for four in 2022,” Pesole said.

“We think this is a reason for markets to keep buying the dips in the dollar for the time being.”

In a testimony at his renomination hearing on Tuesday, Fed chief Powell said the U.S. economy was ready for higher interest rates and a run-off of its asset holdings – dubbed quantitative tightening (QT) – to combat inflation.

But he said policymakers were still debating approaches to reducing the Fed’s balance sheet, and that it could sometimes take two, three or four meetings to make such decisions.

Money markets currently price about 85% odds of a rates lift-off by March, and a total of at least three quarter-point hikes by year-end.

April LaRusse, head of fixed income investment specialists at Insight Investment, noted that recent comments from businesses suggested they faced higher price pressures from raw materials and wages, for instance.

“So, it’s unlikely we get an undershoot in the inflation data… and if it’s as expected, there could be relief that it wasn’t higher,” she said.

The dollar was just 0.1% firmer at 115.40 yen, while the euro was steady at around $1.1364. A rise above $1.1387 would take the single currency to its highest since mid-November.

The Australian dollar, often considered a liquid proxy for risk appetite, pulled back from almost one-week highs at $0.72230 as the dollar regained its footing.

But the greenback was stuck at two-month lows against the Canadian dollar at 1.25345.

And sterling was steady having risen to $1.3645 for the first time since Nov. 4, bolstered by a view that the worst of the Omicron COVID surge maybe be passing in Britain – helping pave the way for another near-term rise in UK interest rates.

The U.S. dollar hovered near the middle of its recent range against major peers on Tuesday as traders looked to incumbent Fed Chair Jerome Powell’s nomination hearing later in the day for new clues on the timing and pace of policy normalization.

In his prepared opening remarks, released Monday, Powell will pledge to prevent high inflation from becoming “entrenched,” but will make no mention of plans for the path of monetary policy.

However, he will take questions from senators in his bid for a second four-year term.

The dollar index, which measures the currency against six counterparts, hovered around 95.93 early in the Asian session.

It hit a more than 16-month high of 96.938 on Nov. 24 amid increasing hawkishness from Fed policy makers, but has since been stuck between that level and 95.544, touched less than a week later, despite a continued ramping up of rhetoric that now has Wall Street banks forecasting four quarter-point rate hikes this year.

TD Securities strategists said it seemed the Fed was of the mindset of “sooner rather than later” for both higher rates and running off its balance sheet after ending bond-buying stimulus – a process dubbed quantitative tightening (QT).

“An affirmation of March tightening and early QT should support USD firmness overall, though within well-established ranges,” they wrote in a research note.

TD expects a first hike in June, but as early as March was also a possibility.

Money markets are priced for an increase by May, with two more by November.

U.S. December consumer inflation data is due to be released on Wednesday, with headline CPI seen coming in at a red-hot 7% on a year-on-year basis, boosting the case for an early increase in interest rates.

The dollar was little changed at 115.23 yen after bouncing off a one-week low of 115.045 overnight.

The euro was about flat at $1.13325, stuck in the middle of its trading range since mid-November.

Sterling was stable at $1.35825 after easing back from Monday’s two-month high of $1.36025.

The Australian dollar added 0.17% to $0.71860, getting support from local retail sales data that came in much higher than economists forecast.