Fasten Your Seat-belt For a Volatile Week

The U.S. dollar broadly outperformed its major peers in recent days as the market started to price in five Federal Reserve rate hikes this year. This week we will get more central bank monetary policy announcements from the European Central Bank and the Bank of England (both decisions are due on Thursday) that will help shape the market mood in the days ahead.

If the ECB and BoE follow in the footsteps of the Fed, offering increasingly hawkish shifts, we could see the euro and British pound strengthening. Traders will brace for elevated volatility in both EUR/USD and GBP/USD in the coming days.

Last but not least, traders’ eyes will be on the non-farm payrolls report on Friday. Here, most attention will be paid to average hourly earnings which are anticipated at 5.2 percent y/y from 4.7 percent prior. A solid earnings reading could boost the U.S. dollar.

ECB decision – “Very different situations”

Following the Fed’s fast tightening path on the one hand and the Bank of England that is gearing up for its second consecutive rate increase this week on the other hand, investors have pulled forward bets for an ECB rate hike as early as this year. ECB President Christine Lagarde, however, has pushed back against those hawkish expectations, highlighting the “very different situations” the three economies face. The ECB will try to reach a reasonable balance between its readiness to change course if inflation pressures prove more persistent and its prudence not to tighten prematurely. Economic growth slowed sharply at the end of last year, and the International Monetary Fund already slashed its 2022 outlook for the euro zone while intensifying tensions at the Russia-Ukraine border have emerged as a new risk.

The ECB is thus expected to maintain its dovish stance over the medium term. Lagarde will probably reiterate that the central bank is unlikely to hike in 2022, but refrain from pushing back on market expectations for tightening in 2023. A failure to push back on market pricing for 2022 would be a sign that the ECB is shifting to a more hawkish stance.

Our technical forecast for EUR/USD ahead of the ECB decision: Slightly bullish with a next target seen at 1.1220-30.

BoE decision – More aggressive path of interest rate hikes?

The Bank of England is expected to raise interest rates to 0.5 percent on Thursday. This move could also open the door for the BoE to start shrinking its balance sheet by stopping the reinvestment of expired bonds. After this February meeting traders bet the BoE will raise rates to 1 percent in June. However, with traders calling the central bank increasingly unpredictable, anything can happen and traders will prepare for both hawkish and less hawkish outcomes.

Our technical forecast for GBP/USD ahead of the BoE decision: Bullish above 1.3450, next target then seen at 1.35.

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