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US dollar weakens as Fed signals tapering must be complete before interest rates can rise

currency-newsUS dollar weakens as Fed signals tapering must be complete before interest rates can rise
The US dollar fell back on Wednesday, in response to the Federal Reserve’s latest forward guidance.

Meanwhile, the pound is off to a slow start this morning, with GBP/EUR subdued at €1.1730 and GBP/USD flat at $1.3267.  GBP/AUD is rangebound at AU$1.8500, while GBP/CAD and GBP/NZD dip to C$1.6993 and NZ$1.9521, respectively.

Looking ahead, the latest interest rate decisions from the Bank of England (BoE) and European Central Bank (ECB) could infuse some notable volatility into currency markets today.
 

What’s been happening?

The US dollar was rocked yesterday following the Federal Reserve’s final policy statement of the year.

While the Fed announced it would be accelerating the winding down of its pandemic-era stimulus, USD investors appeared disappointed by subsequent comments from Fed Chair Jerome Powell in which he suggested it would ‘not be appropriate to raise rates’ while the tapering process is ongoing.

The pound, meanwhile, opened Wednesday’s session on some firm footing, with the currency appreciating in response to the UK’s consumer price index after it reported domestic inflation surged to a decade-high in November.

However, Sterling later shed a good portion of these gains in response to some gloomy Covid headlines from the UK as the country reported a record daily increase in infections.

At the same time, the euro was mostly rangebound through yesterday’s session as the absence of any notable Eurozone data releases left EUR investors to focus on the European Central Bank’s upcoming interest rate decision.
 

What’s coming up?

Its set to be a busy day for GBP and EUR investors today as the BoE and ECB deliver their latest interest rate decisions.

With the BoE no longer expected to raise interest rates, the bank’s forward guidance is likely to act as the main catalyst for the pound. Will a fairly hawkish outlook from the bank in light of the UK’s latest inflation figures, help to bolster Sterling sentiment this afternoon?

On the other side of the Channel, we are likely to see the euro weaken as the ECB is expected to announce plans to temporarily increase its bond purchases by €40bn a month to offset the end of its Pandemic Emergency Purchase Programme (PEPP).

Meanwhile, with US Treasury yields weakening post Fed rate decision, the US dollar could face an uphill battle today.
 
Philip McHugh

Philip McHugh

Joining the corporate trading desk in 2007, Phil now over sees all of Currencies Direct’s corporate dealing activity. Having gained experience working with hundreds of businesses to optimise international payments processes and execute comprehensive risk management strategies, Phil currently works with a portfolio of corporate clients whilst managing Currencies Direct’s overall market exposure

Phil has FCA approval and has completed the Certificate in International Treasury Management (CertiTM)

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