EUR/USD soars to nine-month high following Fed rate decision

Philip McHugh February 2nd 2023 - 2 minute read

The US dollar plummeted on Wednesday following the Federal Reserve’s first interest rate decision of 2023.

Meanwhile, the pound is holding its ground so far this morning, with GBP/EUR stable at €1.1255 and GBP/USD flat at $1.2379. GBP/CAD is rangebound at $1.6442, while GBP/AUD and GBP/NZD hold steady at AU$1.7327 and NZ$1.8974, respectively.

Looking ahead, it seems safe to assume the Bank of England’s (BoE) and European Central Bank’s (ECB) own interest rate decisions will drive movement in the currency market today.

What’s been happening?

The US dollar was met by heavy selling pressure yesterday as the Federal Reserve delivered its latest interest rate decision.

A ‘dovish tilt’ from the Fed as it announced a 25bps rate hike, led USD exchange rates to nosedive, with investors dismissing the central bank’s claims that no rate cuts will take place this year.

Meanwhile, the euro firmed during Wednesday’s European trading session.

Hawkish European Central Bank rate hike expectations helped to underpin the single currency, despite data showing Eurozone inflation cooled at a faster pace than expected in January.

At the same time, the pound struggled to find any meaningful support yesterday.

GBP investors largely shrugged off an upwardly revised manufacturing PMI as they awaited the Bank of England’s (BoE) latest interest rate decision.

What’s coming up?

In the spotlight today we have the latest interest rate decisions from the BoE and ECB.

The BoE’s decision may cause the greatest volatility. While another 50bps rate hike is already priced in, there is still a great deal of uncertainty surrounding the bank’s future policy plans.

If the BoE signals it is nearing the end of its of hiking cycle the pound is likely to plummet. Conversely some hawkish forward guidance could lead Sterling to surge.

The ECB is also expected to deliver a 50bps hike this month. But in contrast to the BoE, the bank is expected to strike a more hawkish tone.

Expect to see the euro to strengthen if ECB President Christine Lagarde reiterates the bank’s plans to ‘stay the course’ and deliver at least one more 50bps hike in the coming months.

Finally, the US dollar may struggle to find support today after yesterday’s Fed decision led to a sharp drop in US Treasury yields.

Written by
Philip McHugh

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