Dollar Shows Mixed Performance After Fed Decision as Yen Strengthens

Investors and forex traders remain focused on the outcome of the Federal Reserve’s monetary policy meeting, after which the interest rate was kept in the 3.50–3.75% range, while the forecast for economic growth this year was revised from 2.3% to 2.4% and the average inflation outlook from 2.4% to 2.7%.

Fed Chair Jerome Powell said that the “oil shock” caused by rising energy prices amid the escalating conflict involving the United States, Israel, and Iran will undoubtedly affect the pace of consumer price growth, although it is still too early to judge the scale and duration of the potential impact on the economy.

Experts interpreted this rhetoric as a signal that the full consequences of the military conflict remain unclear, and that caution is therefore warranted, with no sharp changes in monetary conditions likely in the near term. Despite the worsening inflation outlook, the dot plot showed that most policymakers still expect one rate cut this year and another one next year.

At the same time, the number of officials supporting a complete rejection of the dovish course is also rising: while only six policymakers considered such a scenario at the December meeting, there are now seven. It is also worth noting that uncertainty surrounding the future leadership of the Federal Reserve is growing. Kevin Warsh’s candidacy for the Fed chairmanship had already faced strong opposition in the Senate and could have remained blocked until the criminal investigation into Jerome Powell was concluded. This week, however, Warsh’s name reportedly appeared in documents linked to financier Jeffrey Epstein, raising additional questions among members of Congress and, in theory, potentially becoming grounds for rejecting his confirmation altogether.

Eurozone

The euro is losing value against the yen and showing mixed performance against the US dollar and the pound.

Today, fourth-quarter labor market data were published: wage growth slowed from 3.20% to 3.00%, while the labor cost index eased from 3.40% to 3.30%, confirming signs of slower inflationary processes in the European economy. However, this trend can no longer be considered fully relevant, since the escalation of the Middle East conflict has significantly affected energy prices. At 15:15 (GMT+2), the results of the European Central Bank’s monetary policy meeting will be released. Most experts are confident that policymakers will also maintain a wait-and-see stance, keeping the key rate at 2.15%, the deposit rate at 2.00%, and the marginal lending rate at 2.40%. At the same time, the ECB may signal its readiness to return to a hawkish tone if the US-Iran confrontation triggers a sustained inflationary trend in the eurozone. Many market participants already believe inflation could exceed 3.0% by year-end, becoming a driver for a 25-basis-point rate adjustment as early as December.

United Kingdom

The pound is losing ground against the yen and showing mixed performance against the euro and the US dollar.

Today, the Bank of England kept the interest rate at around 3.75%. In its accompanying statement, the regulator said that the escalation of the military conflict in the Middle East has already led to a significant rise in global energy and commodity prices, which will affect fuel and utility costs for households and indirectly increase costs for businesses, becoming a clear catalyst for faster inflation. In addition, the risks of an economic slowdown will rise substantially if energy prices remain near peak levels for an extended period. Also published today were January labor market data from the UK, which turned out positive: the unemployment rate remained unchanged at 5.2% against preliminary estimates of 5.3%, while employment increased by 84.0K instead of the expected decline of 4.0K.

Japan

The yen is strengthening against its main peers — the euro, the pound, and the US dollar.

At today’s meeting, the Bank of Japan left the interest rate unchanged at 0.75%, but officials reaffirmed their readiness to continue tightening monetary policy. BOJ Governor Kazuo Ueda said the board is now more focused on inflation risks than on the slowdown in economic growth linked to the conflict between the United States and Iran. In his view, the negative impact may be partially offset by the government’s current stimulus measures. It is also worth noting that several members of the meeting disagreed with the broader consensus, arguing that borrowing costs should be adjusted immediately. Board member Hajime Takata said the rate should be raised to 1.00% because inflation has stabilized around 2.0%, while Naoki Tamura expressed the view that consumer prices will settle in the target range not in October, as most officials expect, but already in April. In his remarks to journalists, Ueda did not provide a clear signal on how soon the Bank of Japan may return to a hawkish course, but hinted that this could happen after the publication of updated quarterly GDP and inflation forecasts next month.

Australia

The Australian dollar is losing value against the yen and showing mixed performance against the euro, the pound, and the US dollar.

Investors remain focused on labor market data, which came in mixed: the unemployment rate rose from 4.1% to 4.3%, reaching a three-month high, while employment increased by 48.9K against forecasts of 20.8K, although full-time employment fell by 30.5K. Experts expect that two consecutive rate hikes by the Reserve Bank of Australia in the near term will lead to further cooling in the labor market. In particular, unemployment could rise to 4.5% by the end of the year, reducing the likelihood of further policy tightening.

Oil

Oil prices are showing mixed dynamics today, as the market remains influenced by several opposing factors.

On the bullish side, attacks on fuel and energy infrastructure in the Persian Gulf are continuing. In response to damage at facilities in the South Pars field, forces of Iran’s Islamic Revolutionary Guard Corps attacked LNG processing plants in Ras Laffan, Qatar, including the world’s largest LNG export terminal, which reportedly suffered significant damage. On the other hand, a sharper rise in prices is being limited by the weekly increase in US inventories, which according to the Energy Information Administration rose by 6.156 million barrels, as well as reports that Iranian authorities intend to legally formalize a “permit-based” system for ships passing through the Strait of Hormuz, which in the longer term could lead to a partial stabilization of maritime traffic along this crucial waterway.