Dollar Edges Lower After Hawkish Turn From ECB, BOE

The dollar weakened in early European trade Friday, remaining under pressure the day after the Bank of England raised its key rate and even the European Central Bank said it will slow down its bond-buying from April.

At 2:55 AM ET (0755 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, fell 0.1% to 95.950, having hit its lowest in over a week on Thursday.

GBP/USD traded flat at 1.3319 after climbing as high as 1.3375 in the previous session, its highest for almost a month, when the BoE hiked interest rates for the first time since the beginning of the pandemic, becoming the first G7 central bank to do so since the start of the pandemic.

EUR/USD was also flat at 1.1328 having hit the highest this month on Thursday, following the latest policy meeting of the European Central Bank, in which it announced plans toward asset tapering over the upcoming quarters.

“The ECB paved the way out of the pandemic-era support measures but at the same time retained flexibility to react to unforeseen developments,” said analysts at Nordea, in a note. “We expect net asset purchases to end in H1 2023 and see the first hike in late 2023.”

These moves follow the Federal Reserve announcing on Wednesday that it was accelerating the tapering of its asset-buying program, paving the way for three quarter-percentage-point interest rate hikes by the end of 2022.

However, while the Fed’s stance had been well trailed, the hawkish turns by the ECB and the BoE surprised markets, given that Europe, and the U.K. in particular, is currently looking at an economic slowdown due to increasing cases of Omicron-variant Covid-19.

The U.K. posted a record number of daily coronavirus cases for the second day running on Thursday, with almost 90,000 infections confirmed, while the likes of France and Italy have tightened their restrictions on arrivals.

Elsewhere, USD/TRY climbed 2.7% to 16.0903, the lira falling to new record lows after Turkey’s central bank cut its policy rate again by 100 basis points to 14% despite inflation soaring above 21%.

USD/RUB fell 0.1% to 73.7234 ahead of the latest Bank of Russia meeting, which is expected to deliver another increase in the key interest rate as inflation remains at double the central bank’s 4% target.

The majority of economists in a Bloomberg survey expect a 100 basis-point increase, the second hike of that size this year. The central bank has already raised its key rate by 325 basis points this year.