The dollar takes a dive, BoE and ECB to Unleash Rate Hike Decisions

The dollar took a nosedive on Thursday as the U.S. Federal Reserve announced a turning point in the battle against inflation. The central bank's statement sent a wave of confidence through the markets, leaving investors feeling optimistic that the end of its rate-hike campaign was in sight.

Against a basket of currencies, the U.S. dollar index plummeted to a fresh nine-month low of 100.80, ending more than 1% lower on Wednesday. The Aussie and Kiwi surged to eight-month highs, rallying 1.2% and over 1% respectively, while the dollar slid more than 0.5% against the Japanese yen.

Fed Chair Jerome Powell's remarks on Wednesday set the tone for the dovish cue, announcing that "the disinflationary process has started" in the largest economy in the world. Despite signalling that interest rates would continue to rise, the Fed's statement marked its first explicit recognition of slowing inflation, sending the dollar into a tailspin.

Gold flies to nine-month highs

Gold prices hit a blazing nine-month high as the market was electrified by the Federal Reserve's recent commitment to raising interest rates! The dollar was sent plummeting, while fears of an impending economic slowdown sent shockwaves through the market, making gold an increasingly appealing safe haven.

The Fed's meeting fueled gold's appeal even further, sending prices soaring over 1% as the central bank acknowledged its progress against inflation and raised interest rates by a modest 25 basis points. However, the Fed's uncertainty over where interest rates will peak only added to the excitement, driving expectations for a potential pause in interest rate hikes by mid-2023 and even a reduction by the end of the year as the U.S. economy cools. This is sure to be music to the ears of gold enthusiasts everywhere!

Despite the Fed lifting its benchmark rate to a median of 5.1% in 2023, with a range of 5.00% to 5.25%, many on Wall Street are questioning the need for the Fed to go much further after this latest hike, with monetary policy now at restrictive levels and data pointing to slowing inflation and weaker economic growth.

More rate hikes on the card for Europe

Get ready for a thrilling day in the world of finance as the Bank of England and the European Central Bank unleash their rate hike decisions!

The Bank of England faces a tough challenge as the UK economy battles double-digit inflation, but with recent improvements in the economy, they may adjust their economic forecasts. Meanwhile, the decline in energy prices has reduced the strain on wage packets, but with food price inflation still at 16%, the Bank of England must consider the impact of a weak pound on inflation.

Despite Eurozone inflation easing for the third straight month in January, the ECB may face limited relief as underlying price growth remains steady. However, the real excitement is on the horizon as the Bank of England must weigh the impact of another 50 basis point increase on mortgage costs, with 5-year gilt yields barely moving since November and 2-year yields on the rise.

The euro rose to a 10-month peak of $1.1034, while the sterling moved up 0.14% to $1.2392. The risk is high that the ECB and BoE could create some volatility, with the ECB expected to continue hiking interest rates until at least the end of Q1 2023.

NFP furnishes the week with a greater degree of excitement

Meanwhile, the United States faces its next test in the Fed's fight against inflation with Friday's nonfarm payrolls report. Despite official statistics showing that job openings unexpectedly rose in December, the market is now expecting the Fed funds rate to peak just under 4.9% by June, compared with earlier expectations of a peak of just below 5%. With Friday's nonfarm payrolls report as the next test of the Fed's fight against inflation, the dollar continues to tumble as the market eagerly awaits the outcome.