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Pound, franc slide as central banks pause hikes; dollar holds firm

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Pound, franc slide as central banks pause hikes; dollar holds firm
© Reuters. FILE PHOTO: Japanese yen and U.S. dollar banknotes are seen with a currency exchange rate graph in this illustration picture taken June 16, 2022. REUTERS/Florence Lo/Illustration/File Photo

By Samuel Indyk

LONDON (Reuters) – The pound and Swiss franc tumbled on Thursday after the British and Swiss central banks kept rates unchanged, while the dollar hit a 6-1/2 month high after the U.S. Federal Reserve signalled policy would remain restrictive for longer.

The yen, meanwhile, was at its lowest since November before Friday’s Bank of Japan policy announcement, while central banks in Sweden and Norway both met expectations for 25 basis point rate rises.

The Bank of England halted a run of 14 consecutive rate hikes by voting with a narrow 5-4 margin to keep its Bank Rate at 5.25%, the first time since December 2021 it has not raised rates.

The pound sank to its lowest since March, falling as low as $1.2231 before finding support and settling around $1.2270. Sterling also fell against the euro with the single currency last buying 86.7 pence.

“The Bank has shown time and again that it is placing a higher weight on lagged policy effects, the level of rates, and a more even-handed approach with an aversion to over-tightening,” Goldman Sachs strategists, led by Michael Cahill, said.

“That may ultimately provide more protection for economic activity, but it comes at the expense of leaving sterling more vulnerable.”

Earlier, the Swiss franc dropped after the Swiss National Bank unexpectedly held rates steady, marking the first time the central bank has not hiked since March 2022, although it kept options open for further rate rises.

The euro rose as high as 0.9677 francs and is set for its biggest one-day rise since June. The dollar rose 0.8% to 0.9053 francs, hitting its highest level since June 13.

“The Swiss franc has understandably weakened after the surprise hold in the policy rate today,” ING strategists said in a note.

“However, the SNB has said that it will still be using the exchange rate to “provide appropriate monetary conditions” and to do this will likely continue to sell FX.”

Meanwhile, Sweden’s Riksbank and Norway’s central bank both raised rates by 25 basis points, in line with expectations.

The euro was up 0.3% against the Swedish crown and 0.1% against the Norwegian crown following the respective decisions.

DOLLAR HOLDS FIRM AFTER FED

The Fed held interest rates steady at the 5.25%-5.50% range, in line with market expectations on Wednesday, but it stiffened a hawkish monetary policy stance that its officials increasingly believe can succeed in lowering inflation without wrecking the economy or leading to large job losses.

Along with another possible rate hike this year, the Fed’s updated projections show significantly tighter rates through 2024 than previously expected.

“They were more hawkish further out on the curve with the dot plots signalling just 50 basis points of cuts in 2024,” said Niels Christensen, chief analyst at Nordea.

“The dollar should be well supported toward the end of the year or until we start seeing softer data.”

The , which measures the currency against a basket of rivals, rose as high as 105.68, its strongest since early March, before settling around 105.57.

The euro stood at $1.0643 after falling to a six-month low of $1.0617.

The Japanese yen was feeling the heat after the Fed meeting, hovering around 147.895 per dollar after touching a nearly ten-month low of 148.465 earlier on Thursday.

Even as the yen has slipped back toward levels seen at the end of last year, the possibility of the Bank of Japan tightening policy at Friday’s meeting remains slim.

“It seems unlikely the BOJ will announce any change of policy tomorrow, or soon for that matter. Although you never know for sure with this central bank,” said Matt Simpson, senior market analyst at City Index.

Both the Australian and New Zealand dollars took a hit following the Fed’s meeting, with the Australian currency last down 0.7% and the NZ dollar falling 0.3%, although the latter found some support after data out on Thursday showed the economy grew more than expected in the second quarter.

Forex

Dollar higher on US business activity boost

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By Saqib Iqbal Ahmed

NEW YORK (Reuters) -The dollar rose against the euro on Thursday after data showed U.S. business activity accelerated to the highest level in just over two years in May, suggesting that economic growth picked up half-way through the second quarter.

S&P Global said that its flash U.S. Composite PMI Output Index, which tracks the manufacturing and services sectors, jumped to 54.4 this month. That was the highest level since April 2022 and followed a final reading of 51.3 in April.

A reading above 50 indicates expansion in the private sector.

“The currency action shows the market still responds to strong U.S. economic data in the expected way,” said Marc Chandler, chief market strategist at Bannockburn Global Forex LLC.

“I think the dollar has some more room on the upside,” Chandler said.

Data on Thursday also showed the number of Americans filing new claims for unemployment benefits fell last week, pointing to underlying strength in the labour market that should continue to support the economy.

Federal Reserve officials at their last policy meeting said they still had faith that price pressures would ease at least slowly in coming months, but doubts emerged about whether the current level of interest rates was high enough to guarantee that outcome and “various” officials said they’d be willing to hike borrowing costs again if inflation surged.

“Given the FOMC comments the market is still exaggerating the chances of two rate cuts this year,” Chandler said, noting that the unwinding of rate cut bets would keep the dollar supported in the near term.

The euro was down 0.2% at $1.080525. The common currency rose as high as $1.0861 earlier in the session after the preliminary composite Purchasing Managers’ Index for the currency bloc came in above the 50 level separating growth from contraction for the third month in a row, with even struggling manufacturing showing a recovery.

Better-than-feared economic data for the past few months helped the euro rally in April and early May, and Thursday’s data pushed the currency back towards mid-May’s two-month high of $1.0895.

“The EU PMI figures took a little pressure off of the stagflation theme, but it still feels a little stagflation ‘lite’ if you will, and we need to see more on the growth side there,” Brad Bechtel, global head of FX at Jefferies, said in a note.

The pound slipped 0.2% to $1.2689 against the dollar. Prime Minister Rishi Sunak on Wednesday called a national election, which his Conservatives are widely expected to lose to the opposition Labour Party after 14 years in power. However, sterling options volatility for the period covering the July 4 election did rise. [GBP/]

“The market is fairly confident there’s going to be a Labour government and it’s pretty confident also that the Labour government won’t be that different in terms of fiscal policy, than the current Sunak and (finance minister Jeremy) Hunt mix anyway,” said Jane Foley, head of FX strategy at Rabobank.

The dollar was 0.1% higher against the Japanese currency at 156.91 yen after data showed Japan’s factory activity crept into expansion for the first time in a year in May.

The corporate sector in Japan has been grappling with the weak yen, and nearly half of Japanese firms find the yen’s slide beyond 155 to the dollar harmful to their business, roughly double the percentage of those who see the currency’s weakness as a positive, a Reuters survey showed on Thursday.

The New Zealand dollar slipped 0.1% to $0.60925after data released Thursday showed that retail sales volumes in New Zealand unexpectedly rose, its second day of gains after the Reserve Bank of New Zealand surprised markets on Wednesday by lifting its forecasts for peak interest rates and pushing back when it expects to cut. {AUD/]

© Reuters. FILE PHOTO: U.S. Dollar banknote is seen in this illustration taken July 17, 2022. REUTERS/Dado Ruvic/Illustration/File photo

Among cryptocurrencies, ether was up 1% at $3,776, after rising as high as $3945.50 its highest since mid-March.

It has been surging amid speculation over the potential approval of U.S. spot exchange-traded funds that would track the world’s second-biggest cryptocurrency.

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Forex

UBS suggests shorting USD/CHF amid DXY pullback and data woes

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UBS recommended investors to short the pair, indicating attractive entry levels for the trade. The firm highlighted that the DXY index, which measures the US dollar’s strength against a basket of currencies, has declined by 1.5% from its peak in late April due to disappointing US economic data.

Despite the Federal Reserve’s hawkish stance, with officials hinting that it would take several months of moderating data before considering rate cuts, the US dollar is experiencing conflicting pressures.

On one side, the Fed maintains a tough stance on monetary policy, while on the other, economic indicators in the US are showing signs of deterioration.

UBS emphasized a cautious approach, advising to be selective in making directional trades with the dollar. This strategy aligns with the current economic climate where mixed signals are emanating from policy makers and economic data.

In addition to advising a short position on USD/CHF, UBS also reported closing their long position on , albeit with a marginal gain. This move reflects their response to the evolving market conditions and their ongoing assessment of currency valuations.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

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Forex

Analysts sees upside for EUR/GBP amid weak UK retail sales

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Analysts at ING stated that the currency pair seems undervalued, following the United Kingdom’s retail sales data which came in below expectations.

The report released today showed a 2.7% year-over-year decline in headline retail sales for April, with the core figure, excluding auto fuel, dropping by 2.0%. Moreover, the March sales data was revised downwards.

This follows a subdued UK Purchasing Managers’ Index (PMI) report from Sunday, which indicated a slight uptick in manufacturing but was overshadowed by a decline in the services sector, dragging the composite index down to 52.8.

The financial institution pointed out that the British pound currently appears overpriced compared to the euro. This assessment comes in the wake of a significant hawkish adjustment in the Sonia curve, which ING deems excessive, especially since the unexpectedly high services Consumer Price Index (CPI) for May can be partly ascribed to one-off elements.

Moreover, there are indications of a more dovish stance emerging within the Bank of England’s Monetary Policy Committee (MPC). Market projections are leaning towards a mere 33 basis points of easing by the end of the year and less than 10 basis points for the upcoming meeting in August.

Despite this, ING still anticipates a rate cut in August, dismissing the idea that the UK vote might delay monetary easing. ING highlighted the potential for the short-term swap rate gap between EUR and GBP to shift in favor of the euro, especially with the European Central Bank (ECB) possibly taking a hawkish stance and the Bank of England expected to implement a rate cut in August.

Additionally, the upcoming July vote in the UK could lead to a minor political risk premium being factored into the pound. Given these considerations, ING maintains its outlook that the EUR/GBP pair is likely to rise over the longer term.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

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