Forexlive Americas FX news wrap 14 Dec: ECB and BOE less dovish leads to USD declines | Forexlive

Day 2 of central bank decisions. Yesterday, the Fed and Chair Powell were more dovish, sending yields sharply lower. Today, the Swiss National Bank, the Bank of England, European Central Bank and later in the day, the Central Bank of Mexico, all weighed in with their recent rate decision. For each of them, they too kept rates unchanged. However, safe to say, the decisions were tilting more to the hawkish side.

The Bank of England highlights:

• Vote Outcome: The Bank rate vote ended in a 6-3 decision, which was in line with expectations. Greene, Haskel, and Mann were the members who voted for a 25 basis points increase.

• Decision Nuance: The choice between hiking rates or holding them was again a close call, indicating the complexity of the current economic situation.

• Inflation Outlook: The Bank acknowledges that there is still significant progress to be made in reducing inflation and is committed to taking necessary actions to bring inflation back to the target of 2%.

• Policy Stance: The Bank indicates that monetary policy will need to be restrictive enough, and for a long enough period, to effectively combat inflation.

• Uncertainty Over Inflation Trends: Most policymakers are of the view that it’s too early to assert that services inflation or pay growth are consistently decreasing.

• Potential for Further Tightening: The Bank suggests that additional tightening of monetary policy may be necessary if persistent inflationary pressures are observed.

• Inflation Forecast: The Bank now forecasts inflation to be just under 4.5% by the end of the year, slightly lower than the previous forecast of 4.75%

For the ECB, its highlights from the statement included:

• ECB Interest Rates Unchanged: The key interest rates remain at 4.50%, 4.75%, and 4.00%.

• Inflation Forecast: Expected to temporarily rise, then gradually decrease to the 2% target by 2025.

• Economic Growth Outlook: Subdued in the short term, with growth projected at 0.6% in 2023, increasing to 1.5% by 2025 and 2026.

• Policy Commitment: The ECB aims to maintain rates at levels that help achieve the 2% inflation target, with decisions based on economic data and inflation dynamics.

• Balance Sheet Strategy: Continuation of reinvesting PEPP funds until mid-2024, then reducing the portfolio by €7.5 billion per month in the second half of 2024, ending reinvestments by year-end.

• Refinancing and Asset Purchases: Ongoing assessment of refinancing operations’ impact on monetary policy; gradual decline of the APP portfolio.

• Readiness to Adjust Tools: The ECB is prepared to modify its instruments to maintain its 2% inflation target and ensure effective monetary policy transmission.

Below are the highlights in categories from Lagarde’s press conference:

1. The markets interpreted both central banks as being less dovish/more hawkish when compared to the Fed, and that led to increased USD selling vs the EUR and the GBP. Those two currencies are ending the day as the strongest of the major currencies, while the USD is the runaway weakest of the majors.