KEEPING WITH THE TIMES: After gaining ground overnight versus the dollar, the euro retreated on Thursday as the European Central Bank slowed the pace of its rate rises, one day after the U.S. Federal Reserve indicated it was done with its tightening plan.
After being relatively unchanged before to the judgement, the euro has since fallen to $1.10260, a loss of 0.35%.
With Thursday’s 25-basis-point rise to each of its three policy rates, the European Central Bank (ECB) slowed the pace of its interest rate hikes, which began in the summer of 2017.
In its ongoing fight against persistently high inflation in the euro zone, the central bank did not make any firm promises on future rate rises and instead kept its options open.
According to Sebastian Vismara, global macro economist and strategist at BNY Mellon Investment Management, “the ECB is relatively dovish, the tone is a little more cautious, and there is a bit more focus on the past effects of tightening and the fact that these are being transmitting forcefully to the euro area economy.”
The euro has fallen in value and expectations for interest rate increases at future ECB meetings have dropped, albeit only somewhat, as a result of the ECB’s more moderate tone.
The Fed lifted its benchmark overnight interest rate by a quarter of a percentage point on Wednesday, as predicted, but removed language from its policy statement indicating that it “anticipates” future rate rises will be needed, which caused the euro to reverse part of its 0.57% gain from the previous day.
As the markets price in more European rate rises than in the U.S., European currencies have been appreciating in recent months.
The next big concern for FX markets will be how long rates will remain at current levels if this turns out to be the last rise of the (U.S.) cycle. HSBC analysts wrote as much in a note.
Despite the Fed’s efforts to dissuade investors from betting on a rate decrease this year, buyers have already factored one in.
A further USD decrease later in 2023 will be more challenging “if the Fed is proven right over the course of 2023.”
But for now, “the market is likely to run with the theme of a peak in Fed rates justifying a clear peak in the USD and an ongoing reduction in the greenback’s residual overvaluation,” HSBC said.
The financial markets currently price in a 15% likelihood that the Fed would start lowering rates in June and an additional 80 basis points of rate reduction before the end of the year.
Fears of banking sector disruption have persisted, and recent reports that PacWest Bancorp is considering strategic alternatives have only served to heighten these concerns. The Los Angeles-based lender has reportedly received interest from a number of possible joint venture partners and investors.
The Swiss franc peaked at 0.88215 per dollar, its best since January 2021, while the pound was last quoted at $1.2566, where it has been since the beginning of the year.
The cautious mood helped keep the value of the Japanese yen, a traditional safe haven in times of market volatility, at 134.7 to the US dollar.
With falling U.S. Treasury rates providing support for the rate-sensitive Japanese currency on Wednesday, the dollar lost 1.4% against the yen.
As predicted, the Norwegian central bank increased interest rates by 25 basis points, sending the Norwegian crown on a brief journey. At first, it dropped significantly versus the euro and the dollar, but later, it strengthened again.
Dollars were recently worth 10.69 crowns, down 0.6% from its peak.