Dollar weaker after hawkish FOMC

The US dollar continued to trade lower against a basket of major currencies for the third consecutive day to reach 98.19 despite the strong hawkish message from the FOMC policy meeting late on Wednesday.

The Fed acknowledged the Ukrainian geopolitical risks and slashed its growth projections by almost half to 2.8% for 2022 but raised interest rates by a quarter-percentage as widely expected. Strikingly, however, it signaled six more rate increases this year and pledged to take more aggressive steps if inflation does not converge towards the central bank’s 2.0% symmetrical target by 2024. Of note, the Chairman Jerome Powell revealed the start of the balance sheet reduction as soon as in May with no specific details, though the greenback rose only moderately before giving up some ground on Thursday.

Euro/dollar extended its weekly gains to 1.1066 but gained little extra momentum after the ECB council member Klaas Knot outlined carefully that asset purchases may decline to 10 billion euros in July and will probably end later that month. He also expects a rate hike to be on the table in September, though the March meeting has already telegraphed that to investors. Euro/yen stretched its impressive rally to a fresh one-month high of 131.45.

BoE presses pound lower

On the other hand, the Bank of England (BoE) surprisingly toned down its rate hike communication during today’s policy gathering, knocking down the pound from a weekly high of 1.3200 to 1.3100 against the US dollar.

Unlike the Fed, the ΒοE backed only a moderate tightening in the coming months and questioned investors' aggressive rate hike pricing to 2% by year end, saying that the squeeze on households’ budgets could be larger than previously estimated. The central bank hiked the Bank Rate to 0.75% from 0.50% previously, though Deputy Governor Jon Cunliff surprisingly voted to keep borrowing costs steady, citing demand uncertainty from higher commodity prices. The dovish rate increase helped euro/pound to approach its weekly high of 0.8454.

Yen decelerates ahead of BoJ

The Bank of Japan will next announce its policy decision early on Friday at a tentative time but as usual the meeting will probably be uneventful, with Governor Kuroda reiterating beforehand as always that no adjustments will take place until inflation reaches the 2% target sustainably. The widening monetary policy divergence with the Fed is positively charging dollar/yen, pushing it up to a new five-year high of 119.11 recently. The risk sensitive antipodean currencies have also been significantly outperforming the safe-haven yen lately, unlocking new four-year highs today.

Stocks mixed; commodities up again

Turning to stock markets, Wall Street opened with soft losses after staging an impressive rally on Wednesday. In Europe, the pan-European STOXX 50 was down by 1.0% led mainly by financials. On the other hand, the British FTSE 100 continued its bullish run on the back of energy and utility shares.

In commodity markets, gold has resumed its positive momentum following the bounce off $1,849/ounce, currently trading at $1,943. Copper is another winner today, while oil prices have staged a stronger rally, bouncing up by more than 6% to reach $100/barrel.

Overall, the war in Ukraine will remain the main market moving event for now as the dialogue between Russia and Ukraine over a peace deal continues to run from hot to cold and vice versa even though the two sides have drawn a 15-point plan to end the fighting for the first time since bombardments started two weeks ago.