Bonds Asia: Rate Hold Signals Hawkish Stance, Euro Refreshes 6-Day High

On March 20th, Thursday, the European Central Bank announced that the deposit rate will remain unchanged at 2%, marking the sixth consecutive meeting where the bank kept interest rates steady, in line with analyst expectations. Compared to previous wording, the ECB significantly increased its warning about risks. In its statement, the bank noted that the Middle East conflict has “substantially increased” uncertainty about the eurozone economic outlook, posing upside risks to inflation and downside pressures on economic growth. The latest quarterly economic outlook forecast released simultaneously by the ECB indicates that inflation will rise faster than previously expected, while economic growth will slow down. Scenario analysis further shows that if oil and gas supplies experience sustained disruptions, inflation could exceed baseline forecasts, and growth could fall below baseline forecasts, both of which point to a more complex policy response space. Traders have reduced bets on a rate hike by the ECB, now expecting a 61 basis point increase by the end of the year.

Additionally, the Bank of England’s Monetary Policy Committee announced on the 19th local time that, with a unanimous vote of 9-0, the bank decided to keep the benchmark interest rate unchanged at 3.75%. This is the first time in four and a half years that the committee reached a fully unanimous decision. The core considerations for holding off on easing policies were the volatility in energy prices and inflation risks triggered by Middle East geopolitical conflicts. The Bank of England stated in its decision that the conflict in the Middle East has led to a sharp rise in global energy and commodity prices, directly increasing fuel and utility costs for UK households, and indirectly transmitting through corporate costs. In the short term, the UK’s Consumer Price Index (CPI) inflation rate is expected to rise. The bank also remains highly alert to “second-round effects” in wage and price-setting processes, worried that rising energy prices could trigger a wage-price spiral, intensifying domestic inflation pressures.

Key data to watch today include the eurozone’s January seasonally adjusted trade balance, the UK March CBI industrial orders difference, and Canada’s January retail sales month-over-month.

Dollar Index

The dollar index fell sharply yesterday, breaking below 100.00 and hitting a six-day low, with the spot price trading around 99.30. Aside from profit-taking pressure, the main reasons for the dollar’s weakness were the ECB, BOE, and BOJ all maintaining steady interest rates during the period, emphasizing inflation risks as the primary pressure on the dollar. Additionally, after breaking below the 100.00 support level, some long positions were forced to cut losses, further accelerating the decline. Today, focus on resistance around 99.80, with support at approximately 98.80.

EUR/USD

The euro rebounded sharply yesterday, testing the 1.1600 level and reaching a six-day high, with the spot price around 1.1570. Besides short covering providing some support, the main reason for the euro’s rise was the ECB’s decision to hold rates steady as expected but signaling a hawkish stance. The ECB indicated readiness to act if necessary. Today, watch for resistance around 1.1650, with support at 1.1500.

GBP/USD

The pound surged yesterday, breaking above 1.3400 and reaching a seven-day high, with the spot price around 1.3420. Besides short covering, the main support came from the BOE maintaining rates and signaling a hawkish stance, which cooled expectations of rate cuts. The mixed economic data released in the UK had limited market impact. Today, focus on resistance around 1.3500, with support at 1.3350.