The results of the Fed's FOMC meeting, the BoE MPC, the ECB Board of Governors, the BoJ Policy Board, and the Norges Bank MPC this week were both more hawkish than market expectations.
The US dollar index (DXY) was pressured at around 95.96 in early European trading this Friday (17/December). The results of the FOMC meeting yesterday had a hawkish tone, but the US dollar exchange rate failed to strengthen due to the "buy the rumour, sell the fact" action. Moreover, the results of the central bank meetings of the UK (BoE), Europe (ECB), Japan (BoJ) and Norway (Norges Bank) this week were both more hawkish than market expectations. Only the Swiss central bank (SNB) fully maintains the existing policies.
The BoE's MPC meeting yesterday resulted in a decision to raise interest rates by 15 basis points with a near unanimous vote, even though the consensus expected interest rates to remain. The ECB Board of Governors yesterday also abruptly decided to end the purchase of special pandemic bonds (PEPP) in March 2022, although they were still continuing with the other bond purchase program (APP).
"A cautious ECB tapering move and a surprise BoE rate hike are likely to weigh on the (US dollar index) in the near term, particularly given the oversized USD long position towards the end of the year," analysts at Westpac said in a note to clients, "But the (USD) weakness probably won't last beyond the lows of the 95s range."
Westpac analysts view that the Fed is still far ahead of the ECB in terms of tightening monetary policy (the Fed plans to raise interest rates next year, while the ECB still imposes a negative deposit rate -ed). Therefore, the decline in the US dollar index to the mid-95s is an opportunity to buy USD.
Chris Weston, head of research at broker Pepperstone, also doesn't expect the EUR and GBP to rally too high versus the USD. EUR/USD's break above the 1.1355 level might pave the way for further gains and test the 1.1480 level, but he remains hesitant to buy the euro.
The BoJ and Norges Bank's decisions today are likely to further depress the US dollar index in the short term. In line with the ECB, the BOJ's Policy Board announced a cut in additional bond purchases previously issued to cope with the impact of the pandemic. Meanwhile, MPC Norges Bank bravely raised interest rates by 25 basis points even though the inflation rate was still below the target.
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