Several central bank meetings expected to steer market direction

The US dollar has the upper hand, however if there’s a dovishness to the Fed’s statement, which may happen if there’s the determination to wait to see what effect the big rate rises are having, and the ECB is hawkish, insisting on more rate rises to combat inflation, then this could stir the direction away from USD.

The BoE, like the ECB, is expected to raise rates more than the Fed.

(Video Transcript)

Fed

It's a big week this week for central banks and things kick off tomorrow, Tuesday 31st of January, with the Federal Reserve (Fed) at the beginning of its two days of meetings. It's expected to deliver another interest rate rise after seven in 2022, although at a much slower rate. The market expects a 25-basis point (bp) rise in the federal funds rate to between 4.5 and four and three quarter percent.

Remember in December US inflation decelerated for a sixth straight month at 6.5% - its lowest level since October 2021. US central bankers want to continue to raise rates but much more slowly to see how the economy is responding to the previous hikes and make sure it doesn't go too far.

Dollar basket

This is the dollar basket just coming out at this line of support at 10110, which is the low we had back on the 27th of May 2022. The MACD has turned around this oscillator here at the bottom indicating that we've got the blue line over the red dotted line, which indicates to me that potentially we do have some more upside to go technically, but it's all about that statement from the Fed that we've get at 19:00 Wednesday evening UK time. I

f you are long on this chart going into the news, your stock would be down here at something like the 10075 level, 10167 is over trading at the moment. Any upward move would be capped out potentially by this rise up to here at 10308, which is the lows we had back on the 14th of December.

BoE

Then on Wednesday, the Bank of England (BoE) starts its two-day meeting with inflation at 10.5% in December, higher than in the US and the eurozone with wages excluding bonuses rising at their fastest rate since records began back in 2001.

The Bank of England is likely to raise its main interest rate, the base lending rate, for a 10th consecutive time by half a percentage point to 4%.

Now, at its last meeting in December, the monetary policy committee voted for a 50bp rise to 3.5%. But the vote was split three ways to members voting to end the rate rises while one backed a larger three quarter point move. The balance went for that move up that we saw, according to Reuters.

Economists see a similar split next week because of the uncertainty around inflation. The big question is, how fast will inflation fall? Is there a risk of bottoming out above the Bank of England's target?

GBP/USD

Well, we take a look at what's happening sterling against the US dollar for this. Now this is sterling rising or has been rising against the US dollar the last couple of days, sterling has been falling against that slightly stronger greenback.

And if you're short on this, your stock goes above this line of resistance at around about 12480 level - 12370 trading there at the moment. But we'll certainly be looking to see just what's going on with sterling as to the hike cycle. They see just one rate rise more to four and a quarter percent in March, while financial markets see the end of tightening mid-2023 at 4.5%.

ECB

Then on Thursday, just after the Bank of England decides on its interest rate picture, the European Central Bank (ECB) is seen hiking by another 50-basis points to 3%. There's little doubt about that, according to the CBN members. They've been very transparent in the last few weeks, agreeing with the Christine Lagarde scenario of another significant rate rise.

The ECB is also further away from reaching the limit of its rate. It started its tightening cycle later than many central banks, only raising its main base rate by a total of 250 basis points in 2022 compared with 325 basis points at the Bank of England, and 425 basis points from the Federal Reserve.

EUR/USD

Let's take a look at what's happening with the euro/dollar trade around that interest rate decision in the opposite direction.

As with the DXY, we've seen the MACD turn around in the last 24 hours indicating the momentum is now beginning to pick up on the downside.

If you're short on this trade, your stock goes above this line of resistance, your stop just underneath the 110 level, 20855 is where we are. Support kicks in at 10766. That's it. You are short on this, short euros against that stronger US dollar.

But it does depend on there being an emphasis on the US dollar. If we get anything like a dovish Fed and a hawkish euro area, we could well see this recent trend reversed with a move up for the euro/dollar trade.