Dollar Surges After Hawkish Fed Stance; Sterling Weakens Ahead of BOE

By Peter Nurse

Investing.com - The U.S. dollar surged in early European trade Thursday after the Federal Reserve signaled it will raise interest rates higher than expected, while sterling retreated ahead of the Bank of England policy meeting.

At 03:55 ET (07:55 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 1.1% higher at 112.412, climbing to its highest level in a week.

The U.S. central bank announced another rate hike of 75 basis point rate on Wednesday, its fourth such increase in a row.

This was widely expected, and it was the comments from Chair Jerome Powell indicating that the battle against inflation will require borrowing costs to rise further that propelled the greenback higher.

"Incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected," Powell said, adding: "It is very premature to be thinking about pausing ... we have a ways to go."

These comments ended hopes that he would signal a pivot to a less aggressive stance in the coming months.

That said, even if U.S. monetary policymakers slow or halt their current interest-rate hiking campaign, the dollar will have a monetary “tailwind” in the coming year, according to former Federal Reserve Chair Alan Greenspan.

“Even if, as some prognosticators expect, US inflation crests in the first half of 2023 and the Federal Reserve can slow or even stop the pace of rate increases, the US dollar will still have a monetary tailwind to support it,” Greenspan, an economic adviser to Advisors Capital Management, said, in a note, Wednesday.

EUR/USD fell 0.4% to 0.9777, with the Federal Reserve stealing the monetary tightening thunder from the European Central Bank, after the ECB hiked by 75 basis points last week.

USD/JPY traded flat at 147.89, in holiday-thinned trade, with traders remaining on intervention watch after Japan spent a record $42.8 billion propping up the yen last month, on top of almost $20 billion spent in September.

GBP/USD fell 0.5% to 1.1336 ahead of the latest policy-setting meeting of the Bank of England later in the session.

The U.K. central bank is expected to raise interest rates by three quarters of a percentage point to 3%, its biggest rate rise since 1989, with the base rate climbing to around 5% in mid-2023.

“We think that risks to sterling are skewed to the downside heading into this week’s Bank of England meeting,” said Matthew Ryan, Head of Market Strategy at global financial services firm Ebury, in a note. “The MPC has a recent track record of surprising to the dovish side, and we believe that market participants may well be disappointed once again.”

AUD/USD fell 0.6% to 0.6312, while USD/CNY rose 0.4% to 7.3175, climbing close to a near 15-year high after a private survey showed the country’s services sector shrank more than expected in October, due to continued COVID-linked disruptions.

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