Dollar increases a little bit as the sterling is around 14-month highs

20 Jun 2023 , 10:42 AM

As investors processed a flurry of monetary policy choices made by central banks last week and anticipated a crucial decision by the Bank of England on Thursday, the dollar nudged higher and the British pound was close to a 14-month high.

Global efforts by central banks to reduce excessive inflation have dominated currency market movements, with the dollar index experiencing its worst weekly decline since January last week after the U.S. Federal Reserve decided not to raise interest rates.

The dollar index, which compares the value of the dollar to six other major currencies, increased 0.2% to 102.480. It was still quite close to the 102.00 one-month low it reached on Friday. Due to a holiday, U.S. markets are closed on Monday.

When the Bank of England meets on Thursday, investors anticipate a rate increase of at least 25 basis points as it confronts inflation that is already running at more than four times its objective.

On the anticipation that UK interest rates will rise faster than those of other major nations, the pound is trading at close to 14-month highs against the dollar. At $1.27960, the pound lost 0.2% of its value.

The odds of the BoE choosing a 25 basis point increase are 72%, and the odds of a 50 basis point increase are 28%, according to the money markets.

In a busy week for central banks last week, the Bank of Japan’s decision to maintain its ultra-easy policies on Friday kept the yen brittle while the European Central Bank increased rates by 25 basis points on Thursday and left the door open to additional increases.

According to ECB board member Isabel Schnabel, the risk of overshooting recently raised predictions for inflation in the euro zone should lead the ECB to raise rates too much rather than too little.

Philip Lane, the head economist for the bloc, had stated that although the September meeting is too far away and that the decision would be influenced by new data, the ECB is likely to raise rates again next month.

The yen was essentially unchanged at 141.840, trading close to a seven-month low of 142.005 earlier on Monday. The euro fell 0.2% to $1.09190, trading close to a one-month high.

This week’s Federal Reserve Chair Jerome Powell’s scheduled speech before the US Congress will be eagerly watched by traders for any clues about the direction interest rates may take in the largest economy in the world.

The testimony was one of the key risk events for the dollar this week, according to currency experts at MUFG, but they expected similar messaging after the Fed decision last week.

The decision to postpone a raise this month did not indicate that the cycle of rate increases was ended, the analysts said. ‘The Fed was clear that they now felt they could slow the pace of hikes,’ they added.

According to the CME FedWatch tool, markets are pricing in a 72% chance that the Fed will raise interest rates by 25 basis points next month.

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