© Reuters. FILE PHOTO: US dollar banknotes are shown in this illustration taken on March 10, 2023. REUTERS/Dado Rović/Illustration/File photo
Written by Ian Withers
LONDON (Reuters) – The dollar rose and the British pound neared a 14-month high on Monday as investors digested a raft of monetary policy decisions by central banks last week and looked forward to a tough decision by the Bank of England on Thursday. .
Currency market moves were dominated by central bank efforts globally to rein in soaring inflation, with it dropping to its biggest weekly drop since January last week after the US Federal Reserve skipped a rate hike.
The dollar index, which tracks the greenback against six major currencies, rose 0.1% to 102,420. It remained not far from the one-month low of 102.00 touched on Friday. US markets are closed on Monday for a holiday.
Investors expect the Bank of England to raise interest rates by at least 25 basis points when it meets on Thursday, as it fights inflation that has more than quadrupled its target.
The pound is trading near 14-month highs against the dollar on expectations that higher interest rates in the UK will outpace other major economies. The British pound fell 0.1% to $1.28080.
Money markets are putting a 74% chance of the BoE choosing a 25bp hike and a 26% chance of a 50bp jump.
In a busy week for central banks last week, the European Central Bank on Thursday raised interest rates by 25 basis points and left the door open for further hikes, while the Bank of Japan’s decision on Friday to stick to its ultra-easy policy kept the yen in check. breakable.
European Central Bank Governing Council member Isabel Schnabel said on Monday that inflation in the eurozone is at risk of exceeding recently raised expectations and that the European Central Bank should err on the side of raising interest rates too much rather than too little.
The bloc’s chief economist, Philip Lane, said earlier that the ECB is likely to raise interest rates again next month, but the September meeting is too far away, and the decision will be shaped by incoming data.
The euro fell 0.2 percent to $1.09230, trading near a one-month high, while the yen was broadly steady at 141.840, near a seven-month low of 142.005 earlier on Monday.
Traders will be closely watching US congressional testimony scheduled to be delivered by Federal Reserve Chairman Jerome Powell on Wednesday and Thursday this week for any hints about the future path of rates in the world’s largest economy.
MUFG currency analysts said in a note that the testimony was one of the important risk events for the dollar this week, but said they expected similar messages after last week’s Federal Reserve decision.
“The Fed has been clear that they now feel they can slow the pace of increases, but the decision to skip this month’s increase does not mean the cycle is over,” the analysts said.
CME FedWatch showed that markets are pricing in a 72% probability of a 25 basis point Fed hike next month.