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Fundamental Analysis

Currency Futures React as the ECB Moves to Tame Inflation

  • ECB officials are expecting more rate hikes to tame inflation.
  • Some experts say the US has lost its global growth leadership position.
  • Markets are expecting a 25bps rate hike from the Bank of Canada.

Most currency futures were up on Monday as the dollar was slightly weaker than a basket of currencies, trading at 101.740. 

As more hawkish remarks about European interest rates clashed with market expectations for a less aggressive Federal Reserve, euro futures reached a nine-month high against the dollar.

Klaas Knot, an ECB’s governing council member, predicted that interest rates would increase by 50 basis points in February and March and then continue to rise in the following months.

Eurozone inflation (Source: Eurostat)
Eurozone inflation (Source: Eurostat)

Despite easing price pressures, core inflation numbers in the eurozone hit a record high. This means the ECB still has more work to lower inflation.

If the most recent PMI surveys are to be trusted, the US has lost its global growth leadership position, according to Ray Attrill, head of FX strategy at NAB. Meanwhile, since early December, gas prices have decreased by 60%, significantly lessening the negative terms of trade shock dragging on the Eurozone/EUR.

“Moreover, US inflation is seen declining farther and quicker than the Fed’s estimates,” he continued. Under this situation, the USD has room to fall considerably more this year.

Similar reasoning applies to the pound, with markets predicting that the Bank of England will increase interest rates by half a point to 4.0% at its policy meeting next week.

The yen fell against the dollar after the Bank of Japan (BOJ) refused to budge from its ultra-easy bond control policy in the face of market criticism. 

Analysts predict that the BOJ will maintain its position at least until the March policy meeting. The next obstacle will be the likely appointment of a new 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.

The Bank of Canada’s meeting on Wednesday will be notable because of the interest rate debate, as markets expect another quarter-point increase to 4.5%. However, this will mark the end of the tightening cycle in the country.

The Canadian dollar was somewhat higher than the American dollar, having recovered on Friday after domestic retail sales data came in much better than anticipated.