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The prospect of major central banks raising interest rates is complicated


[The Bank of England may not be as hawkish as the European Central Bank]

EUR/GBP has stabilized after a sharp rebound on Wednesday. The ECB has taken a more hawkish stance than the BoE, with yesterday's Bank of England policymaker panel survey showing that businesses now expect to raise prices and wages at a slower pace, favoring a more cautious approach by the BoE Monetary Policy. The Bank of England will raise interest rates by 25 basis points on March 23, but market expectations of a further 50 basis points after that appear to be too aggressive. EUR/GBP is likely to continue to find support above 0.89 as EUR is likely to gain more momentum in the cross and erratic risk sentiment should hit GBP harder.

[The Bank of Canada's suspension of interest rate hike will have a complex impact on the Canadian dollar]

The Bank of Canada may pause its rate hike cycle at its March 8 meeting, which could have both a negative and a positive impact on the Canadian dollar. A pause in rate hikes could widen the U.S.-Canadian interest rate differential, which is negative for the loonie. Still, a more cautious monetary policy should prevent the build-up of a Canadian dollar risk premium linked to Canada's fragile housing market. In other words, the Bank of Canada's pause in rate hikes means less upside and downside risk for the loonie. USD/CAD could fall below 1.3000 by year-end, driven by dollar weakness and improving risk sentiment.

[The European Central Bank may raise interest rates further]

The final Eurozone PMI data for February suggested that the region's economy is recovering, posing an upside risk to first-quarter GDP forecasts. With core inflation worrisome in February, a quick recovery from year-end weakness would be double-edged, as it would encourage the ECB to raise rates further in the second quarter. While GDP performance in the first half of 2023 is likely to far exceed expectations, stronger monetary tightening from the second half of 2023 will weigh on economic activity, meaning overall economic growth will be mediocre for the full year.

[Traders bet on the Fed raising interest rates by 50 basis points in March]

The market has accumulated a large number of secured overnight funding rate futures (SOFR) that the Fed will raise interest rates by 50 basis points in March. The market placed the aforementioned low-cost risk-hedging strategy bets on the April and June SOFR contracts. A flurry of data reports suggested the U.S. economy remains strong despite a sharp tightening of monetary policy over the past year. If the Fed resumes raising interest rates by 50 basis points at its March 21-22 meeting, investors in these low-priced buy options are doing a lot of big things. If you bought $1 million of SOFR options expiring in April on Thursday, you could have made a maximum profit of about $13 million. However, swap market pricing shows that the probability of a 25 basis point rate cut by the end of the year is still around 50%.

[The Federal Reserve’s hawkish tone has always supported the dollar]

The U.S. central bank is widely expected to stick to its hawkish stance amid stubbornly high inflation. The number of U.S. initial jobless claims fell short of expectations last week, fueling speculation that the Federal Reserve will raise interest rates above 5.50%. Hawkish comments from Fed officials reaffirmed that bet. Indeed, Atlanta Fed President Bostic insisted that the policy rate needs to rise to a range of 5.00%-5.25% and remain there through 2024.

[China's economy is fully recovering, the safe-haven dollar is sold]

The safe-haven dollar came under pressure as China reopened and the economy fully recovered, with risk appetite rising. China's manufacturing sector has seen its strongest recovery in more than a decade - both manufacturing and non-manufacturing purchasing managers' indexes (PMIs) were very strong in February, and macro sentiment has improved. China's economic growth momentum is strong in early 2023. We see strong short-term growth momentum as pent-up demand rebounds. Not only in services, but also in manufacturing. We see pent-up demand for private consumption and investment in real estate and manufacturing as confidence in 2022 is very low, leading to high savings and a focus on strengthening balance sheets.

The above information is provided by special analysts and is for reference only. CM Trade does not guarantee the accuracy, timeliness and completeness of the information content, so you should not place too much reliance on the information provided. CM Trade is not a company that provides financial advice, and only provides services of the nature of execution of orders. Readers are advised to seek relevant investment advice on their own. Please see our full disclaimer.

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