Investors await the Fed’s guidance on monetary policy

It has been a slow start to the week for currency markets and this trend is set to continue today. With no headline data out, markets have been left to trade within ranges as they look for direction.

EUR

President Lagarde’s comments, following the European Central Bank’s interest rate decision last week, have been the hot topic of discussion this week. She was quoted saying the ECB couldn’t rule out raising interest rates this year. GBP/EUR fell almost two cents following the comments, as this was a fundamental shift in policy from the ECB’s previous meeting.

However yesterday GBP/EUR found some ground, albeit marginal gains, following comments from ECB member Francois Villeroy. He stated that markets may have overreacted somewhat to Lagarde’s comments. She still believes inflation will return back towards the 2% target by year end.

GBP

While we don’t believe the ECB will be raising rates this year – these comments has kept GBP/EUR under pressure. With no key data set to be released for the pound, we expect it to be rangebound for the foreseeable future.

USD

All eyes are on tomorrow’s inflation release. CPI year on year (January) is set to come in at 5.9% from a previous 5.5%. Should the reading come out higher than expected, the Federal Reserve will be under close watch as investors await the Fed’s guidance on monetary policy. The likelihood of an interest rate hike in March is almost certain but the level to which the rates will increase remains to be seen.

Key announcements

None