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Dollar Consolidates Ahead of FOMC Meeting

The US Dollar consolidated during Monday’s trading as the Federal Reserve is set to begin its two-day policy meeting where it is widely expected to raise interest rates by 25-basis points to tame rising inflation. The Dollar index remained elevated above the 99.0 level and just below the 21-month high of 99.4 reached last week. Last week’s US inflation data saw headline rates hit a 40-year high of 7.9%. The data came amid growing concerns that the headline rate is expected to break above 8% following a commodity driven surge in prices and which had seen increased bets of the Fed hiking by 50-basis points at the March meeting. Fed Chair Jerome Powell, in his testimony last week, commented that a 25-basis point rate hike is more likely, but doors for an aggressive tightening policy are still open.

Looking ahead to today, it’s a quiet economic calendar as markets focus continues to follow geopolitical developments and as attention turns to Wednesday’s FOMC rate decision and commentary report.

Unemployment Falls Below Pre-Pandemic Level

Sterling nudged higher against the US Dollar although it was still difficult to gain any significant overall traction. There were fresh concerns over the UK outlook even with a decline in energy prices and there were also doubts whether the Bank of England would meet market expectations surrounding interest rate increases this year. Recently BoE members have echoed a slightly neutral tone with regards to policy.

This morning U.K. unemployment dropped below its pre-pandemic level for the first time as companies generated more jobs and granted higher wages than expected. The jobless rate fell to 3.9% in the three months through January, the lowest since the start of 2020. The figures also showed the redundancy rate fell to a record low and job vacancies reached a new high, adding to evidence of a strong recovery from Covid-19 in the weeks before the war in Ukraine.

Attention turns to Lagarde’s Comments

The Euro remained unchanged against several major pairs on Monday following the European Central banks hawkish monetary policy last week. The single currency drew support as investors moved from commodity-based currencies which triggered another round of short covering into the Euro. Yesterday’s trading saw commodity currencies fall sharply following the dip in oil prices, which also saw US treasury yields move higher above 2%.

Today, markets will await the release of the German ZEW economic sentiment survey and Industrial production data. Later in the afternoon, attention will turn to ECB president Christine Lagarde’s speech at the WELT economic Summit in Berlin. Investors will look to fresh clues over monetary policy as Lagarde last week commented that policymakers were planning to end its bond buying programme in the third quarter of this year to curb rising inflation rates. However, the ECB also commented that any adjustments to interest rates will be gradual following the ending of their bond buying program.

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