As more hawkish remarks about European interest rates clashed with market expectations for a less assertive Federal Reserve, the euro touched a nine-month high against the dollar on Monday.
The euro broke through the most recent record of $1.08875 and advanced to a spike high from last April around $1.0936 by moving as far as $1.0903.
It was helped by Klaas Knot, a member of the ECB’s governing council, who predicted that interest rates will increase by 50 basis points for both February and March and then continue to rise in the following months.
The comment was interpreted as resistance against recent predictions that the ECB might scale it back to quarter-point increases starting in March because the knot is regarded as a hawk among officials.
An increase of 50 basis points in the month of March and a final peak of 3.25% were both favourably predicted by analysts polled.
In contrast, futures have steadily decreased the expected peak for rates from the present range of 4.25% to 4.50% to 4.75% to 5.0%, pricing out nearly any possibility that the Fed will rise by 50 basis points next month.
Additionally, investors have approximately 50 basis points of rate reduction from the United States factored in for the second quarter of the year due to weaker inflation, consumer spending, and housing statistics.
This week’s scheduled flash surveys on manufacturing in January are expected to reveal stronger improvement in Europe than the US, in part due to declining energy prices.
If the most latest PMI surveys are to be accepted, Ray Attrill, director of FX strategy at NAB, believes that the U.S. has lost its status as the global growth leader.
Meanwhile, since early December, petrol prices have dropped by 60%, significantly lowering the negative trade terms shock pressing on the Eurozone/EUR.
Additionally, the Fed’s own estimates for U.S. inflation appear to be out of date, he said. This situation said the USD has room to decline significantly more this year.
According to Attrill, the euro will hit $1.1000 by March as well as $1.1700 by the end of the year.
Similar reasoning applies to the pound, with markets predicting that the Bank of England will increase interest rates by half a percentage point to 4.0% at its meeting held next week.
Inching closer to last week’s high of $1.2435, the pound was higher at $1.2420.
Thus, at 101.740, the dollar was slightly weaker than a basket of currencies and barely above its most recent eight-month low of 101.510.
After the Bank of Japan (BOJ) refused to budge from its ultra-easy bond management policy in the face of market criticism, the dollar at least managed to maintain stability against the yen.
Analysts predict that the BOJ would maintain its position at least until the March policy meeting, notwithstanding the likely appointment of a fresh BOJ governor in February.
The yen may rise once again if there is any indication the replacement will be less dovish than the current governor, Haruhiko Kuroda.
Following last week’s huge swings between 127.22 and 131.58, the dollar was now maintaining its position at 129.59 yen.
The Bank of Canada’s session on Wednesday will be notable because of the interest rate debate because markets are expecting another quarter-point increase to 4.5%, but that will signal the end of the tightening bias in that country.
The Canadian dollar was somewhat higher at $1.3374 to the American dollar, having recovered from $1.3497 on Friday after domestic retail sales data came in much better than anticipated.
The market gets hit by this news like a cannon. Given that small firms can never regain their pre-pandemic level of strength, their impact on countering inflation is still uncertain.
