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Forex Today: Focus shifts to BOE and ECB as post-Fed US Dollar weakness continues

Here is what you need to know on Thursday, February 2:

The US Dollar Index stays on the back foot and trades at its lowest level in nearly 10 months at around 101.00 following Wednesday's sharp decline that was triggered by FOMC Chairman Jerome Powell's dovish remarks. The Bank of England (BOE) and the European Central Bank (ECB) will announce the policy decisions on Thursday. BOE Governor Andrew Bailey and ECB President Christine Lagarde will comment on the policy outlook and respond to questions from the press after the publication of official statements. Later in the day, the US economic docket will feature the weekly Initial Jobless Claims and the Unit Labor Costs data for the fourth quarter.

The Federal Reserve raised the policy rate by 25 basis points to the range of 4.5-4.75% as expected. In the policy statement, the US central bank said that inflation 'has eased somewhat but remains elevated' and repeated that the Committee anticipates that ongoing increases in the target range will be appropriate. Although the initial reaction helped the US Dollar gather strength against its rivals, the currency came under heavy selling pressure during Chairman Powell's press conference.

Powell, once again, tried to convince markets that there will not be a rate cut in 2023 but acknowledged that the disinflationary process has started. The Chairman also said that if inflation comes down faster than expected, that would play into policy. In turn, Wall Street's main indexes gained traction, the benchmark 10-year US Treasury bond yield declined sharply and the US Dollar suffered large losses.

Fueled by the broad US Dollar weakness, EUR/USD registered impressive gains and climbed above 1.1000 for the first time since early April. The ECB is widely expected to raise its key rate by 50 basis points following the first policy meeting of 2023. Lagarde delivered surprisingly hawkish comments in December and market participants will look for confirmation of the ECB's willingness to continue to raise rates to fight inflation.

European Central Bank Preview: Lagarde needs to repeat her hawkish message.

GBP/USD snapped a three-day losing streak on Wednesday and gained more than 50 pips. The pair stays in a consolidation phase slightly below 1.2400 early Thursday. The BOE is also forecast to opt for a 50 bps hike but investors refrain from betting on further Pound Sterling for now amid the possibility of the BOE pointing to an end to the tightening cycle on worsening growth outlook.

BoE Interest Rate Decision Preview: The last 50 bps hike but not the end yet.

USD/JPY lost more than 100 pips on Wednesday and broke below 129.00. Bank of Japan (BoJ) Deputy Governor Masazumi Wakatabe said early Thursday that the BoJ must not be complacent as downward price pressures remains farily strong. Following these comments, the pair stays relatively quiet slightly above 128.50.

Gold price capitalized on slumping US Treasury bond yields and surged to its strongest level since April near $1,960 before retreating toward $1,950. 

Bitcoin surged to its highest level since August above $24,200 late Wednesday but struggled to preserve its bullish momentum. BTC/USD was last seen moving sideways at around $23,800. Ethereum gained nearly 4% on Wednesday and continued to push higher early Thursday. At the time of press, ETH/USD was up 1.6% on a daily basis at $1,670.

Author

Eren Sengezer

As an economist at heart, Eren Sengezer specializes in the assessment of the short-term and long-term impacts of macroeconomic data, central bank policies and political developments on financial assets.

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