Watching EUR/USD, USD/JPY as central bankers lead the market moves

ECB policymaker and French central bank governor, François Villeroy de Galhau, says the European Central Bank may see peak rates by the summer. That would mean that a year of tightening policy would be enough to take inflation down to a more manageable level, closer to the ECB’s 2% target area.

Meanwhile St Louis bank governor James Bullard, who is no longer a voting member of the US Federal Reserve after having been on the board last year, says 2023 will see the US economy ‘normalise’ and cut the need for higher rates.

Finally, the Bank of Japan has been back, trying to stabilise the yen, telling traders that it sees little need to rush any further yield adjustments and this has led to another weakening in the yen today.

(Video Transcript)

Forex markets moving

Central bankers have been out making comments which have that moved the foreign exchange markets.

The French ECB policymaker and governor of the Bank of France, François Villeroy de Galhau, said yesterday that the European Central Bank on interest rates could peak by this summer around about July.

The ECB has delivered four successive rate hikes over the last six or seven months or so. In his New Year's address, Villeroy de Galhau said that it would be desirable to reach the right terminal rate by next summer, but it is too early to say at what level. He added that the European Central Bank needs to be pragmatic and guided by observed data, including underlying inflation without fetishism for increases that are too mechanical.

In the US, meanwhile, James Bullard, one of the voting Fed members, has been out as well, saying yesterday that the new year could finally bring relief from inflation.

The St Louis Federal Reserve leader said the Federal Open Market Committee (FOMC) has taken aggressive action during 2022, with ongoing increases in the policy rate planned for 2023. This has returned inflation expectations to a level consistent with the Fed's 2% inflation target.

Bullard is of the opinion that during 2023, actual inflation will likely follow inflation expectations to a lower level as the real economy starts to normalise.

EUR/USD

This is the euro/dollar chart that we've got today, the euro pulling back against the USD. Part of that, I guess, is the French comments. But also what James Bullard is saying, which is giving a little bit of an extra frisson to the dollar on the upside, pulling the euro down to 10511.

James Bullard would not hold a voting role in the FOMC this year due to the annual rotation of regional Fed leaders on that panel. But he was a voting member last year.

USD/JPY

Let me just change this chart as well on to another area of the market where we've seen some central bank activity. This is the US dollar rising against the Japanese yen, the yen at the moment at levels not seen since the 20th of December.

The Bank of Japan (BoJ) has made another announcement overnight on its stance on its recent bond buying program, which has been responsible for the strength seen recently for the Japanese yen.

This is the dollar pulling back against that stronger Japanese yen. But this uptick has come as a result of the Bank of Japan making another announcement on its stance on its recent bond buying program, which has been responsible for the strength. It says it sees little need to rush any further yield adjustments. And this has led to another weakening in the yen in today's session.