ECB Hikes Refinancing Rate: Euro Surges, Dollar and Yen Falter
The European Central Bank increased the main refinancing rate to 4.00% and was relatively hawkish in its forward guidance. As a result, the Euro appreciated against the currency market but mainly gained against the US Dollar and Japanese Yen. The US Dollar and the Japanese Yen depreciate due to the unchanged monetary policy and disbelief amongst investors regarding potential future rate hikes. After the Euro, the best-performing currency of the day was the British Pound, the most robust currency of the week.
The Pound is now close to a 60-week high against the US Dollar and has risen 1.87% this week. The price movement is being influenced by the upcoming interest rate decision from the Bank of England next week. Markets expect the Bank of England’s base rate to increase to 4.75% or 5.00%. The Bank of England governor and UK Chancellor have backed further interest rate hikes due to the high level of inflation in the UK. The UK Chancellor advises, “The UK has no alternative but to raise interest rates”.
According to Reuters, most economists believe the UK regulators may increase interest rates by 50 basis points. If the Bank of England opts to hike 0.50%, the Pound may find significant support against competitors. This is due to higher inflation and a harsher rate hike. Whereas the ECB only hiked 0.25%. According to the ECB President, a rate hike in July is likely, but interest rates may continue to rise after the summer months.
XAU/USD - Dollar Falters Supporting Gold
The price of Gold, over the past 24 hours, has experienced mixed price movements in both directions of the market. The Fed’s “pause” and the weaker US Dollar is supporting the price of Gold. However, the price is also pressured by global central banks increasing interest rates and expecting the Fed to return to hiking. The price of Gold is also trading within a downward regression channel. The bullish price action from yesterday has brought the price to the upper band but has not formed a breakout. A breakout is possible if the price continues to increase by a further 0.40%.
However, traders can also monitor oscillators for divergence at the point of a breakout, and the price is overbought. The price of Gold is also increasing above the Ichimoku trading cloud, and moving averages formed bullish crossovers. As a result, most indicators are signaling upward price movement. However, investors should also consider monitoring the performance of the Dollar due to its strong correlation.
The US Dollar throughout the day will be influenced by the Prelim Consumer Sentiment and FOMC member, Mr. Waller, press conference. Investors will specifically be looking to see Mr. Waller's view on a further two interest rate hikes. If the FOMC members continue to advise the central bank will hike on at least two more occasions, the Dollar may find additional support, and Gold may be pressured. The Chairmen of the Federal Reserve have already advised that inflation will have to remain at its 2% target for some time before considering lowering interest rates. Mr. Powell speculated that a “pivot” maybe two years out.
According to the US Commodity Futures Trading Commission, sellers reduced the number of contracts by 0.919 thousand last week. At the same time, buyers increased them by 0.913 thousand, which indicates almost entirely neutral weekly dynamics. When looking at the overall contracts, bears still hold the lead, meaning that institutional investors continue to believe the price of Gold will likely decline in the longer term.
Summary:
- The European Central Bank increased the main refinancing rate to 4.00% and was relatively hawkish in its forward guidance.
- The US Dollar and the Japanese Yen depreciate due to the unchanged monetary policy and disbelief amongst investors regarding potential future rate hikes.
- The Pound is now close to a 60-week high against the US Dollar and has risen 1.87% this week.
- Markets expect the Bank of England’s base rate to increase to 4.75% or 5.00%. The UK Chancellor backs further interest rate hikes as there is “no alternative”.
- The Fed’s “pause” and the weaker US Dollar is supporting the price of Gold. However, global central banks increasing interest rates can reapply pressure.
