Daily Forex Market Report 15-Dec-2022: Sterling hits a volatility streak against USD as the market gears up for Bank of England’s rate decision

Cable ended yesterday’s trading session in a stronger position as the US dollar encountered selling pressure due to a particularly soft inflation reading.

But having added half a percent to close Wednesday at 1.241, the GBP/USD pair has since cut back slightly to 1.238 in this morning’s Asia trading window.

GBP/USD cuts back slightly on Thursday morning – Source: capital.com

The pound is still in a strong position against the dollar though, as the market gears up for today’s interest rate decision from the Bank of England.

A 50 bps hike in line with yesterday’s Federal Reserve announcement is more or less a given, but the real story will be in the BoE’s forward projections.

Gilt yields have come down a long way since the mini-budget armageddon, but have started rising in the past week, suggesting that the market could be pricing in rate rises on the hawkish side in 2023.

Despite Sterling’s pre-policy announcement volatility streak against the greenback (see below), the EUR/GBP trading pair remains wedded to the 86p price point

Source: Pantheon Macroeconomics

We’ll also get an interest rate decision from the European Central Bank today.

Eurozone inflation is still particularly painful, but a reversion to 50 bps following two straight bouts of jumbo hikes is largely expected.

Whether that results in a softening of the euro against the US dollar will depend on what the bank has in store for 2023. In the meantime, EUR/USD remains strong at 1.065, despite edging back around 0.2% from an intraday high of 1.068 in this morning’s Asia hours.

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Employment data also failed to impress, while the goods trade balance widened its deficit more than expected.

As such, Federal Reserve chair signalled a slower pace of interest rate hikes in the months to come.

"It makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down,” said Powell, though he did note that the terminal rate could be "somewhat higher" than the 4.6% indicated by in the September projections.

EUR/GBP closed the Wednesday session at .863, around 12 basis points below the intraday high, though the euro has the slight upper hand this morning having added a few pips.

Yesterday’s EU headline inflation data came in at a flat 10% against a 10.3% forecast, though that figure is still unacceptable high given the 2% target, so excessive rate hikes are likely to stay on the agenda in the coming months.

Combined with Powell’s dovish overtures, EUR/USD jumped a full percentage point to 1.042 yesterday, and continued to rally another 0.33% to 1.045 in today’s Asia window.

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