Currency rates in fragile balance; the dollar rate dependent on Fed, the pound must rely on the Bank of England (Daily analysis 14.03.2022)

The ongoing invasion of Ukraine continues to be a key trend-setting factor in financial markets. However, this week it will be difficult to pass by the meetings of central banks. The Federal Reserve will start its tightening cycle, the Bank of England will continue raising rates. The EUR/USD pair cannot break away from 1.10, the GBP/USD is at 1.30, but the EUR/CHF exchange rate is moving away from parity and is more than 2% above last Monday's all-time low.

Dollar, pound: central banks will raise rates

This week the Federal Reserve will begin a cycle of raising interest rates. The labour market is red-hot, and inflation even before the invasion of Ukraine was the highest in 40 years. The market estimates that the cost of money in the USA will amount to nearly 2% in a year from now.

Shortly, this will be the dollar's advantage, particularly against the euro, which is unlikely to raise its first rate earlier than in Q4 2022. The zloty, after a series of six rate hikes raising the reference rate to 3.5% and thanks to the hawkish stance of the Monetary Policy Council - in contrast to the second half of last year - should be immune to the foregone and fully digested by the market perspective of tightening process in the USA.

Among the main currencies, the Canadian dollar, the New Zealand dollar and the pound sterling can count on the most decisive interest rate hikes this year. On Thursday, the Bank of England will raise the rate for the third time - thus staying true to the strategy of accumulating tightening early in the cycle. Given that the pound has been weaker than the euro over the past month and has lost significantly against the dollar, the continuation of a firm, hawkish stance may translate into a more favourable view of the British currency.