Forex Market Analysis: Major Currency Pairs

Forex Market Analysis: Major Currency Pairs

The forex market witnessed various currency movements last week, with a focus on central bank decisions and efforts to combat inflation. The US Dollar Index experienced its largest weekly decline since January after the US Federal Reserve opted to hold interest rates steady. Meanwhile, the Bank of England’s upcoming decision on Thursday has kept the British Pound near a 14-month high.

US Dollar Gains Slightly as Market Digests Central Bank Decisions

Central bank actions to curb inflation have dominated currency market movements. The US Dollar Index, which measures the currency against major counterparts, inched up 0.1% to 102.420. However, it remains close to a one-month low, last Friday’s level of 102.00. US markets were closed on Monday for a holiday.

Investors are eagerly awaiting the Bank of England’s meeting on Thursday, expecting a rate hike of at least 25 basis points. The pound has been trading near 14-month highs against the dollar, reflecting expectations of UK interest rate increases outpacing those of other major economies. The pound slightly declined by 0.1% to $1.28080.

The market currently assigns a 74% probability of a 25 basis point hike and a 26% likelihood of a 50 basis point jump by the Bank of England.

Euro Zone and Yen’s Fragile Position in Forex Market

Last week, the European Central Bank raised rates by 25 basis points and signaled the possibility of further hikes. Meanwhile, the Bank of Japan maintained its ultra-easy policy, leaving the yen vulnerable. Eurozone inflation is at risk of exceeding recent forecasts, leading ECB board member Isabel Schnabel to advocate for potential rate increases.

The euro dipped 0.2% to $1.09230, trading near a one-month peak, while the yen remained relatively flat at 141.840, close to a seven-month low of 142.005 observed earlier on Monday.

Federal Reserve Testimony and Market Expectations

This week, traders will closely monitor the congressional testimony by Federal Reserve Chair Jerome Powell on Wednesday and Thursday for insights into the future path of interest rates in the US. Analysts anticipate a similar message to last week’s Fed decision.

Market pricing indicates a 72% probability of a 25 basis point rate hike by the Fed next month, as shown by the CME FedWatch tool.

The forex market is influenced by a range of factors, including central bank decisions, inflation concerns, and economic indicators. Traders and investors will continue to assess these factors and adjust their positions accordingly.