Important calendar events
The dollar rallied on Monday, with the dollar index rising above 103.3. US Treasury yields also followed an upwards trajectory, with the US 10-year bond yield rising to 3.72%.
The ongoing debate around the US debt ceiling is causing economic uncertainty and may affect dollar prices. The US dollar and Treasury yields were buoyed on Tuesday by debt default fears. US Treasury Secretary Janet Yellen has warned that the office would not meet all US government obligations by June 1. House Speaker McCarthy and President Biden started talks on the debt ceiling last week, which were considered to be productive. US President Biden stated that he is confident that he, and House Speaker McCarthy, will agree on the budget. Talks between the two officials were resumed on Monday and US President Biden stated that he is optimistic that they will make some progress.
However, US Federal Reserve Chair Jerome Powell caused a stir in markets last week, as his statements at a Fed conference in Washington indicated that the US Central Bank may pivot towards a more dovish direction. Powell indicated on Friday that, after 10 straight rate hikes, the Fed may be considering a pause in rate hikes in June. Powell remarked that “the risks of doing too much versus doing too little are becoming more balanced.” This was a marked shift from his stance earlier in the year, hinting at a pivot to a more dovish fiscal policy.
US Headline inflation dropped to 4.9% year-on-year in April, decelerating from a 5.0% print in March. US Inflation cooled more than expected in April, as markets were anticipating a 5.0% print. Core CPI, however, which excludes food and energy, proved to be persistent, remaining at 5.5% year-on-year. Slowing inflation increases the chances that the Federal Reserve could pause its interest rate hikes.
The Federal Reserve raised interest rates by 25 basis points at its latest monetary policy meeting, bringing the benchmark interest rate to a 16-year high target range of 5.00% to 5.25%.
Markets anticipate a pause in rate hikes after May’s interest raise. The US Central Bank has signaled that its hawkish policy is coming to an end, as prolonged tightening is putting the economy at risk and the recent turmoil in the banking sector has increased recession concerns. Many analysts predict that there is a high probability of rate cuts starting in November, depending on economic conditions and inflationary pressures.
Advance GDP data for the year's first quarter showed that the US economy expanded by 1.1% against expectations of 2% and a 2.6% growth in Q4 of 2022. Advance GDP Price Index on the other hand rose by 4.0% in Q1 of 2023, versus 3.7% expected. This index is a measure of inflation and indicates that price pressures remain high.
US Flash Manufacturing and Services PMI data are due on Tuesday and can cause volatility in dollar prices. Core PCE Price Index on the 26th is one of the most highly anticipated fundamentals this week, as it is the Fed’s preferred inflation gauge.
The EUR/USD pair traded sideways on Monday, oscillating around the 1.081 level. If the currency pair goes up, it may encounter resistance near 1.090. If the EUR/USD pair declines, it may find support at 1.075.
The ECB raised interest rates by 25 bp at its latest monetary policy meeting last week, bringing its main refinancing rate to 3.75%. The ECB had raised interest rates by 50 bp in previous meetings and is slowing down the pace of rate hikes.
The ECB has left the door open for further rate hikes as inflationary pressures in the EU remain high. The ECB, however, is expected to reassess its policy direction ahead of its next meeting in June. EU policymakers must take a lot of variables into account, including the effect of economic tightening on the now fragile banking sector.
ECB President Christine Lagarde has stated that the ECB is approaching a key juncture and that further action is necessary to bring inflation down to the bank’s 2% goal. Lagarde’s comments point to further rate hikes up ahead, while the US Fed has signaled a pause in rate hikes.
Price pressures in the Eurozone remain high. Headline inflation rose to 7.0% year-on-year in April from 6.9% in March, in line with expectations. Core CPI, which excludes food and energy, dropped slightly to 5.6% on an annual basis in April from 5.7% in March. Eurozone inflation is not showing signs of cooling despite the ECB’s aggressive tightening.
GDP Flash data for the year's first quarter showed that the Eurozone economy expanded by 0.1%, registering a small improvement against the 0 print for the final quarter of 2022.
On the data front, Flash Manufacturing and Services PMI data are scheduled to be released on Tuesday for some of the Eurozone’s leading economies and the EU as a whole and may affect the Euro.
The GBP/USD pair traded sideways on Monday fluctuating around 1.244. If the GBP/USD rate goes up, it may encounter resistance near 1.254, while support may be found near 1.240.
BOE governor Andrew Bailey has stated that Britain’s labor market is showing signs of reduced inflationary pressures. Bailey, however, stressed that the easing in labor market tightness is happening at a slower pace than anticipated. Signs of cooling inflationary pressures may encourage the BOE to halt its hawkish monetary policy.
The BOE raised interest rates by 25 basis points at its latest meeting in May, bringing the bank rate to 4.5%. Market odds are in favor of more BOE rate hikes up ahead and many analysts predict no rate cuts at all within the year. After Bailey’s speech, however, the odds of another rate hike at June’s policy meeting went down.
The BOE has been following an aggressively hawkish monetary policy, aiming to bring inflation down. Inflation in the UK is still rampant, however, after more than a year of raising interest rates. British headline inflation remained above the 10% level in March, dropping to 10.1% year-on-year from 10.5% in February. Inflation in the UK has become entrenched, forcing the BOE to continue its policy of economic tightening against a weak economic backdrop.
The UK economy registered stagnation in March according to recent GDP data. Monthly GDP dropped to zero, falling below expectations of 0.1% expansion. In addition, the IMF has downgraded the UK’s growth forecast, predicting that the British economy will contract by 0.6% this year, which is also consistent with BOE forecasts. April’s GDP print will be released on Friday, a day after the BOE policy meeting.
The UK’s grim economic outlook limits policymakers’ ability to increase interest rates sufficiently to rein in inflation. The British economy is struggling, and policymakers will have to assess how much tightening it can withstand to bring inflation down.
UK Flash Manufacturing and Services PMI data on Tuesday may cause some volatility in the price of the Sterling.
The Yen lost strength against the dollar on Monday and USD/JPY rose to its highest level since November, near 138.5. If the USD/JPY pair declines, it may find support near 133.7. If the pair climbs, it may find resistance at 138.7.
The safe-haven Yen has benefitted in the past few weeks from fears of a US debt default. The start of negotiations between House Speaker McCarthy and President Biden on the US debt ceiling, however, put pressure on the Yen last week. Talks between the two officials were resumed on Monday and US President Biden stated that he is optimistic that they will make some progress. Increased risk-on sentiment drove the Yen down on Monday.
Preliminary GDP data for the first quarter of the year released last week were optimistic, providing support for the Yen. The Japanese economy expanded by 0.4% in Q1 of 2023, after reaching stagnation during the last quarter of 2022. The GDP data exceeded expectations of a 0.2% growth in the first quarter of the year, alleviating recession concerns for Japan. The final GDP Price Index printed showed a 2.0% annual expansion, versus 1.2% the previous quarter. Japan’s economic recovery increases the odds of a hawkish pivot in BOJ’s monetary policy.
The BOJ decided to continue its dovish monetary policy at the bank’s latest meeting in April. This was the first meeting with the newly-appointed BOJ Governor Kazuo Ueda at the helm. Japanese policymakers maintained ultra-low interest rates at the BOJ policy meeting, keeping the central bank’s refinancing rate at -0.10%.
The BOJ modified its forward guidance slightly at its latest meeting by removing a pledge to keep interest rates at current or lower levels. In addition, the BOJ announced a review of the impact of its easing policies with a planned time frame of around one to one-and-a-half years. This signals a policy change down the road, although it is clear that the BOJ does not have any immediate plans to pivot to a more hawkish policy.
BOJ Core CPI rose to 2.9% in March on an annual basis from 2.7% in February. March’s print exceeded expectations of a 2.6% growth, indicating that price pressures in Japan continue to rise. National Core CPI remained unchanged at 3.1% year-on-year in March. Tokyo Core CPI for April was hotter than expected, at 3.5% on an annual basis, against expectations of a 3.2% print. Inflation in Japan remains steadily above the BOJ’s 2% target, putting pressure on businesses and households. Increased price pressures and wages, raise concerns of a wage-price spiral and may force the BOJ to pivot towards a more hawkish policy.
BOJ Core CPI and Flash Manufacturing PMI data are scheduled to be released on Tuesday for Japan and may affect the Yen.
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