Dollar Rebounds After Sharp Losses Post Fed Meeting

The U.S. dollar edged higher in early European trade Thursday, attempting to rebound after the previous session’s sharp losses as the Federal Reserve raised interest rates but also toned down expectations of even larger future hikes.

At 3:05 AM ET (0705 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, rose 0.2% to 102.828, after falling almost 1% from near a two-decade high in the wake of the Fed decision.

EUR/USD fell 0.2% to 1.0598 after rising around 1% in Asian trading, while USD/JPY rose 0.4% to 129.55, after falling below the physiologically important 130 level for the first time in a week.

The U.S. central bank on Wednesday announced a 50 basis point hike, its largest increase since 2000, as widely expected.

But Chair Jerome Powell’s comments that Fed members weren’t actively considering 75 basis point moves in the future surprised many in the foreign exchange markets as traders had been increasingly betting that the FOMC would opt for an even bigger rate increase to try and combat inflation running at levels not seen in four decades.

That said, the dollar is attempting a rebound on Thursday with a further 200 bps of hikes still priced in for the rest of the year.

“Market pricing isn’t especially aggressive relative to history. It doesn’t look especially aggressive given the position the economy is currently in,” said analysts at ING, in a note. “While the Fed likely won’t admit it, we’re convinced they will be taking a close look at the impact on long run inflation expectations post the FOMC.”

Additionally, “the FOMC’s focus on fighting inflation and front-loading rate hikes continues to point at a supported dollar in the summer months.”

Attention now turns to the Bank of England, with the U.K. central bank widely expected to hike by 25 basis points later in the session, which would be its fourth consecutive meeting with an increase in interest rates.

“The BoE’s hawkish stance hasn’t stemmed the pound’s plunge, with GBP/USD falling 4.31% in the month of April. I don’t expect the pound to get much relief after a 0.25% hike, and the risk to sterling remains tilted to the downside,” said Kenneth Fisher, an analyst at OANDA.

GBP/USD traded 0.6% lower at 1.2542.

Elsewhere, AUD/USD fell 0.6% to 0.7222, handing back some of the pair’s earlier gains after the Reserve Bank of Australia hiked interest rates on Tuesday to combat inflation, while USD/CNY traded 0.1% higher to 6.6171 amid fears that strict COVID lockdowns will hamper China’s efforts to boost economic growth.

Poland and the Czech Republic are both expected to raise interest rates later Thursday to curb quickening inflation, with the Polish central bank seen raising its key rate by a full percentage point to 5.5%. A 50 basis point hike is expected in Prague, bringing the Czech benchmark rate to 5.5%.