The Euro has been steadily gaining against the US dollar due to a more hawkish stance on interest rates from the European Central Bank (ECB). The Euro has reached $1.0870, nearing its nine-month peak of $1.08875. ECB governing council member, Klaas Knot, has stated that interest rates will rise by 50 basis points in both February and March and continue to rise in the following months. This statement, coming from a hawkish policy maker, is in contrast to market expectations for a less aggressive Federal Reserve.
In contrast, futures have priced out almost any chance the Fed could move by 50 basis points next month and have lowered the likely peak for rates to 4.75% to 5.0%, from the current 4.25% to 4.50%. Investors also have around 50 basis points of U.S. rate cuts priced in for the second half of the year, reflecting softer data on inflation, consumer spending and housing.
Flash surveys on January manufacturing due this week are forecast to show more improvement in Europe, in part thanks to falling energy costs, than in the United States. The US has reportedly lost its global growth leadership position as per PMI surveys. Additionally, US inflation is seen falling further and faster than the Fed’s own projections. Under this scenario, the USD has scope to fall much further this year.
Ray Attrill, head of FX strategy at NAB, sees the Euro reaching $1.1000 by March and $1.1700 by year end. Much the same argument goes for sterling, with markets wagering the Bank of England will hike by half a point to 4.0% at its policy meeting next week.
The focus on interest rates will make the Bank of Canada’s meeting on Wednesday of some note, with markets leaning toward another quarter-point hike to 4.5%, but that to be the end of the tightening cycle there.
The Canadian currency was a touch firmer at $1.3374 per US dollar, having bounced from $1.3497 on Friday when local data on retail sales proved a lot less weak than expected.
The dollar has at least managed to steady on the yen after the Bank of Japan (BOJ) defied market pressure to reverse its ultra-easy bond control policy. Analysts assume the BOJ will stand the line until at least the next policy meeting in March, though one hurdle will be the expected naming of a new BOJ governor in February.
Any hint the replacement is less dovish than current governor Haruhiko Kuroda could see the yen climb anew. The potential change in the BOJ’s governor could have a significant impact on the value of the yen, as the current governor, Haruhiko Kuroda, has been known for his dovish policies.
In addition to the ECB’s hawkish stance, the Euro is also being supported by positive economic data coming out of Europe. Flash surveys for January manufacturing are expected to show an improvement in Europe, which is attributed to falling energy costs. In contrast, the United States is facing softer data on inflation, consumer spending, and housing, which is causing investors to price in around 50 basis points of U.S. rate cuts for the second half of the year.
In light of these developments, FX strategy head at NAB, Ray Attrill, predicts that the Euro will reach $1.1000 by March and $1.1700 by year-end. Similarly, the market is also wagering that the Bank of England will hike by half a point to 4.0% at its policy meeting next week.
The focus on interest rates will also make the Bank of Canada’s meeting on Wednesday of note, with markets leaning towards another quarter-point hike to 4.5%, but the end of the tightening cycle. The Canadian currency is currently a touch firmer at $1.3374 per U.S. dollar, having bounced from $1.3497 on Friday when local data on retail sales proved less weak than expected.
In conclusion, the Euro is gaining against the US dollar due to a more hawkish stance from the ECB and positive economic data coming out of Europe. Meanwhile, the US is facing softer data on inflation, consumer spending, and housing, causing investors to price in U.S rate cuts. The potential change in the BOJ’s governor and the Bank of Canada’s meeting also have the potential to impact currency values. As always, it is important to monitor these developments and their potential effects on the economy.