Published: 08/03/2023 By ECAPSterling lost notable ground against the Dollar and slid against the Euro following yesterday’s comments made by the head of the US central bank that indicated interest rates in the world's largest economy would be going higher than previously expected. This, in turn, adds to the negative investor environment and continues to weigh on 'high beta' currencies such as the pound which tends to struggle when investors are acting defensively. Ultimately, the developments also underscored a growing chasm between the outlook for Bank of England interest rates and those of the U.S. Federal Reserve and the European Central Bank, with the former likely to hike less than its two larger rivals.
The Euro tried to hold its ground yesterday following the release of German industrial production which rose 3.5% on the month in January, a rebound from the revised 2.4% fall the prior month. Furthermore, retail sales in the euro zone’s largest economy fell 0.3% in the same month, an improvement from the 5.3% slump in December. Looking forward, revised euro zone gross domestic product figures for the fourth quarter are due later in the session. Moreover, European Central Bank President Christine Lagarde is scheduled to speak at an event organized by the World Trade Organization in Geneva. Ultimately, her comments will be studied carefully for clues of future monetary policy, especially as she guided towards a 50-basis point hike over the weekend.
The dollar scaled multi-month highs against most major currencies yesterday after Federal Reserve Chair Jerome Powell warned that US interest rates might need to go up even faster and higher than expected to rein in stubborn inflation. Powell told lawmakers on Capitol Hill that recent US economic data was stronger than expected and so the speed and size of future hikes may also need to increase, which sent short-term US rate expectations surging. Fed funds futures traders are now pricing in a roughly 60% probability that the Fed will hike rates by 50-basis points at its March 21-22 meeting. The probability had been seen at around 22% earlier on Tuesday.