After the Fed’s dovish hike, BoE’s and ECB’s interest rate decisions come into focus

The USD weakened across the board yesterday and during today’s Asian session and the Fed’s interest rate decision seemed to be the key factor behind it. The bank as was widely expected proceeded with a 25-basis points rate hike cementing the downshift in its rate hiking path. Yet more rate hikes are to be expected as in its accompanying statement the bank mentioned that “The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time”. On the other hand, Fed Chairman Powell sounded to be tilting towards the dovish side. The Fed Chairman characteristically stated that despite inflationary pressures easing in the US economy the bank’s battle against rising prices is far from over, and he added that “We can now say for the first time that the disinflationary process has started”. He even did not exclude the possibility of rate cuts this year should inflation come down much more quickly. Overall, the event had a bearish effect on the USD, while it provided extensive support for US stock markets and the market’s attention may start shifting towards BoE’s and ECB’s interest rate decisions, while at the end of the week, we get the US employment report for January.

BoE today is expected to hike rates by 50 basis points, raising the Bank rate from 3.5% to 4% and currently GBP OIS imply a probability of 86.71% for such a scenario to materialize. The bank is also expected to keep a confident hawkish tone in its accompanying statement, given the high inflationary pressures in the UK economy which may serve as a prelude for more rate hikes in the coming months. On the other hand, a slowdown in BoE’s rate-hiking path is possible in the next months. Hence the bank may start shifting its tone in order to prepare the markets for the downshift in rate hikes to come. Later on, we get ECB’s interest rate decision and the bank is expected to also hike rates by 50 basis points, raising the deposit rate to 2.5% and the refinancing rate to 3.0% and currently EUR OIS imply a probability of 91.33% for such a scenario to materialize. Given that inflation remains at relatively high levels in the Eurozone, despite the slowdown in January’s preliminary reading, we would not be surprised to see the bank also adopting a hawkish confident tone in its accompanying statement. We note the risk of EUR pairs to remain volatile after the release, given Lagarde’s press conference half an hour later.

EUR/USD was on the rise yesterday breaking above the 1.1000 (S1) resistance line, now turned to support, for the first time since the beginning of April. We tend to maintain a bullish outlook for the pair as the RSI indicator is above the reading of 70, underscoring the bullish sentiment, yet the indicator may also imply that the pair has reached overbought levels and is about to correct lower. Should the bulls maintain control over EUR/USD, we may see the pair aiming if not breaking the 1.1180 (R1) resistance line. Should the bears take over, we may see EUR/USD breaking the 1.1000 (S1) line and aim for the 1.0855 (S2) support level.

GBP/USD  remained in a sideways motion after bouncing on the 1.2270 (S1) support line. We tend to maintain our bias for the sideways motion to continue, yet BoE’s interest rate decision may alter the pair’s direction. Should cable find extensive fresh buying orders along its path we may see it breaking the 1.2465 (R1) resistance line and aim for the 1.2665 (R2) level. Should a selling interest be expressed by the market we may see the pair breaking the 1.2270 (S1) support line and aim for the 1.2115 (S2) support level.  

 Other highlights for the day:

Today in the late European session, we get from the Czech Republic CNB’s interest rate decision, while at the same time, we also note the release of the US weekly initial jobless claims figure and later in the American session, we get the US factory orders growth rate for December. During tomorrow’s Asian session, we get from China the Caixin Services PMI figure for January.

EUR/USD H4 Chart

Support: 1.1000 (S1), 1.0855 (S2), 1.0715 (S3)

Resistance: 1.1180 (R1), 1.1325 (R2), 1.1495 (R3)

GBP/USD H4 Chart

Support: 1.2270 (S1), 1.2115 (S2), 1.1925 (S3)

Resistance: 1.2465 (R1), 1.2665 (R2), 1.2860 (R3)

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