Last week’s ECB rate decision turned out to be in line with market expectations as a more hawkish stance seemed to have not materialised. The ECB governing council kept the financing, deposits, loans, and three other interest rate indicators unchanged this time. The news release reiterated that the central bank would end its asset-buying program (APP) on July 1, assuming a 25 basis points interest rate hike in July. The extent of inflation will predetermine the rate hike in September. Therefore, the EURUSD pair ended its gains at 1.0750.
This week is a central bank focused week, with the United States, the United Kingdom, Switzerland, and Japan announcing interest rate decisions. At the same time, the market is focused on the pace of monetary policy tightening by the Federal Reserve, which dominates the financial markets.
The market expects the Fed to announce a 50 basis point hike, raising the federal benchmark rate to 1.5%. If the Fed meets market expectations, the markets will not be very volatile. Following a 50 basis points rate hike based on concerns about the economic slowdown and signals that inflation has peaked, the Fed is expected to pause its monetary policy tightening in September. Suppose the Fed does not adopt a cautious stance in this regard but insists on raising interest rates by 50 basis points in July as originally planned. In that case, the US dollar index could remain above 104. Especially in response to the Fed’s hints that a hefty interest rate hike is still needed in September, the US dollar index has the opportunity to challenge the 105 or 106 level.
The downward pressure on the pound is high
The Bank of England will also announce its interest rate decision on Thursday. Many will be focused on the magnitude and number of future rate hikes planned during the year. Concerns about whether the central bank will indicate the possibility of a one-off 50 basis point rate hike before September will be one of the crucial indicators of the pound’s positive potential. The Bank of England’s hawkish tone may continue to boost the pound, pushing it to trade above the 1.25 mark. The market has started worrying about the UK’s economic prospects and has lowered its rate hike expectations. Interest rates in the UK and US will put more pressure on the pound to rally against the dollar or break below the monthly low of 1.2160, after which the next test is at the 1.20 level.
