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Dollar climbs on hawkish Fed rhetoric

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Written by:
Myrsini Giannouli

07 April 2022
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Important calendar events

  • JPY: 30-y Bond Auction, Leading Indicators
  • USD: Unemployment Claims, Natural Gas Storage, Monthly Consumer Credit, FOMC Member Bullard Speech, Treasury Sec Yellen Speech
  • EUR: Monthly Retail Sales, Spanish and French 10-y Bond Auction, ECB Monetary Policy Meeting Accounts

USD

The dollar continued gaining rising against other currencies on Wednesday, with the dollar index climbing above the 99.7 level. Reports of escalating violence against Ukraine and increased sanctions on Russia have turned investors’ interest towards safe-haven assets once again. US treasury yields continued rising on Wednesday, with the 10-year treasury yields climbing above 2.65% for the first time since 2019, as investors anticipate a more aggressively hawkish Fed policy.

The Biden administration announced new sanctions on Wednesday, targeting Russia’s largest financial institutions to increase economic pressure on Russia. US sanctions are having a large impact on the Russian economy, with the country hovering at the edge of its first default since 1998. The US Treasury Department has blocked US banks from handling dollar payments from Russia, with JPMorgan having to deny on Wednesday a payment of $649mn of interest and principal. Russia instead has attempted to pay in Roubles, a move which amounts to a default of its debt.

US Treasury Secretary Janet Yellen warned on Wednesday that the war in Ukraine would have an enormous global economic impact. The minutes of the Fed’s latest meeting were also released on Wednesday and signaled that the US Central Bank would reduce its bond holdings by as much as $95 billion per month. 

FOMC minutes also showed that several Fed officials were in favor of a rate hike of 50 base points last month, increasing the chances of a 50 bp increase in the Fed’s benchmark interest rate in May. Over the past couple of weeks, Fed rhetoric was one of the primary drivers of USD price, as investors scan Fed members’ statements to gain insight into the Fed’s future direction. The dollar has been climbing, as markets are beginning to price in a steep rate hike of 50 base points at the Fed’s next policy meeting in May.

FOMC members Brainard and Williams delivered speeches on Tuesday, pointing to an increasingly hawkish fiscal policy, boosting the dollar. Brainard, who is known for her comparatively dovish stance, stated in her speech that the US central bank needs to act quickly to drive down inflation, with a rapid reduction in the balancing sheet and aggressive rate hikes. 

The US Central bank is attempting to bring down inflation that has been rising at the fastest rate in 40 years and, in its latest policy meeting in March, raised its benchmark interest rate by 25 base points, bringing its interest rate to 0.50%. The 25-base point rate hike was considered conservative, but recent statements by FOMC members, show a shift towards a more aggressively hawkish policy.

Indicators of economic health and employment in the US are scheduled to be released on Thursday, including Unemployment Claims, Natural Gas Storage, and Monthly Consumer Credit. In addition, FOMC Member Bullard and Treasury Secretary Yellen are due to deliver speeches on Wednesday, which may cause volatility in the currency, as they may contain hints of the direction of the US fiscal policy.

TRADE USD PAIRS

EUR 

The Euro traded sideways against the dollar on Wednesday, with the EUR/USD rate fluctuating slightly around the 1.090 level. If the currency pair goes up, it may encounter resistance at 1.113 and further up at 1.148, while if it declines, support may be found at the 1.080 level. 

Reports of escalating Russian attacks against Ukraine have boosted the safe-haven dollar this week, while the Euro retreated. A new round of sanctions on Russia was discussed at ECOFIN meetings on Tuesday. Proposed EU sanctions against Russia have weighed down the Euro, as the EU is planning a ban on coal imports from Russia, worth €4bn a year. EU officials also stated on Tuesday that the new sanctions would include a full ban on four Russian banks, as well as a ban on Russian ships and road operators. EU diplomats failed to agree on a ban on Russian coal on Wednesday though, proposed by the European Commission, citing technical difficulties mainly by Germany, which is a major coal importer from Russia.

Russia’s demands for payments of energy imports in Roubles have increased concerns of an impending energy crisis in Europe, putting pressure on the Euro. Germany has already entered the initial phases of implementing an emergency gas law, preparing for rationing gas resources among its population. In addition, as the first round of the French Presidential elections is drawing near, the Euro comes under pressure from the political uncertainty in one of the Eurozone’s leading economies.

Monthly German Factory Orders released on Wednesday, which are indicators of economic health for the Eurozone’s leading economy, were lower than expected. Monthly PPI data were also released, which are indicators of inflation in the Eurozone, and showed that producer selling prices did not rise as high as anticipated. 

Last week, Europe’s headline inflation hit a record high of 7.5%, which may prompt the ECB to take swift action to tackle unprecedented inflation rates in the Eurozone. The ECB is trying to avert a dangerous economic effect known as stagflation, the mix of economic stagnation and high inflation rates.

ECB President Lagarde stated last week that the growth of the Eurozone economy has been stalled by the war in Ukraine and that inflation will likely rise even further, stressing that the ECB needs to remain flexible and may alter its monetary policy in response to unforeseen inflationary and economic pressures. 

The ECB has been pursuing a more cautious fiscal policy than other major Central Banks and does not plan to raise its benchmark interest rate before the end of its bond-buying program in the third quarter of 2022. As the Fed and the BOE have already raised their benchmark interest rates, the Euro remains at a disadvantage from the difference in interest rates.

On Thursday, Monthly Retail Sales data are scheduled to be released and there is also the Spanish and French 10-y Bond Auction. These may provide some indications regarding the state of the EU economy, but are not expected to affect the currency significantly. In addition, the ECB Monetary Policy Meeting Accounts are due to be released on Thursday, which may provide insight into the direction of the ECB’s future monetary policy.

EURUSD 1hr chart

TRADE EUR PAIRS

GBP 

The GBP/USD rate traded sideways on Wednesday, around the 1.308 level. If the GBP/USD rate goes up, it may encounter resistance at the 1.331 level and further up near the 1.341 level, while if it declines, support may be found near the 1.300 level. 

Construction PMI data released on Wednesday were higher than expected, indicating that the British economy is starting to recover from the effects of the pandemic, boosting the pound.

Reports of new western sanctions on Russia have bolstered the safe-haven dollar against riskier currencies this week. In addition, the sterling has lost ground against the dollar, due to the divergence in monetary policy between the Fed and the BOE. Although the BOE started the year with a strong hawkish policy, there are signs that its stance may soften in the coming months, weighed down by a fragile economy. In contrast, the increasingly hawkish Fed rhetoric is boosting the dollar against the pound.

On Monday, BOE Governor Andrew Bailey stressed the importance of delivering a clear message to the public regarding the BOE’s future policy. He pointed out that the joint effects of COVID and the war in Ukraine on the global economy would take some time to manifest fully and, in the meantime, the BOE would need to remain cautious. His speech was seen as dovish by investors, putting pressure on the pound. Last week, Bailey had warned that the energy crisis in the UK was going to be ‘historic’, in a speech that was again considered more dovish than expected, especially compared to the more hawkish Fed rhetoric. 

In its latest meeting in March, the BOE raised its benchmark interest rate by 25 base points, bringing its interest rate to 0.75%. The Bank of England is shifting to a more hawkish policy and a return to pre-pandemic interest rates this year in an attempt to tackle inflation. 

UK inflation is already at a 30-year high and expected to rise further, as the war in Ukraine raises the price of key commodities and energy. The Office for Budget Responsibility has set the average inflation forecast for the year to 7.4%, with a peak rate of close to 9% in Q4. Rising commodity prices and import costs in the UK, and especially the high costs of imported energy, are driving inflation rates even higher. A tighter fiscal policy and consecutive rate hikes though may stifle the country’s economy, forcing the BOE to perform a balancing act between bringing inflation under control and allowing for economic growth.

Construction PMI data are scheduled to be released on Wednesday for the sterling, which can provide an indication of economic health for the UK, and may cause slight volatility in the currency.

GBPUSD 1hr chart

TRADE GBP PAIRS

JPY 

The Yen traded sideways against the dollar on Wednesday, with the USD/JPY rate fluctuating around the 123.8 level. The USD/JPY is following an uptrend and if it rises further, it may encounter resistance at the 2015 high of 125.1. If the USD/JPY declines, support might be found near the 118 level and further down at 114.8. 

The safe-haven dollar was boosted these past few days by reports of renewed hostilities in Ukraine and new sanctions on Russia. The Yen is also considered a safe-haven currency but has not been affected as much as other safe-haven assets by the crisis in Ukraine, and many investors have been doubting its safe-haven status. 

Annual Average Cash Earnings and Annual Household Spending data were released on Tuesday for the Yen, which was mixed for the state of the economy in Japan and failed to provide support for the currency.

In addition, Bank of Japan Governor Haruhiko Kuroda, commented on Tuesday on the weakening Yen, expressing concern that recent yen moves have been somewhat rapid. Kuroda however, reiterated the benefits of a weaker Yen especially to Japan’s exports, although he acknowledged the added burden of the weak currency on households. Overall, his statements were considered to be in favor of the weak yen, although the BOJ will be monitoring the currency for sudden fluctuations.

In the past few months, the Yen has been affected primarily by the BOJ’s fiscal policy. In its latest monetary policy meeting in March, the Bank of Japan maintained its ultra-accommodating monetary policy and did not raise its negative interest rate from -0.10%. The difference in interest rates with other major Central Banks, especially with the Fed and the BOE, puts the Yen at a disadvantage driving its price down.

In the BOJ Summary of Opinions published last week, Japanese policymakers stated that inflationary pressures are building in Japan, with inflation growing to 1%, which is still far from the BOJ’s 2% target. Bank of Japan board members seemed skeptical about the rise in inflation though, expressing doubts on whether the rise was sustainable and concluded that the BOJ must continue its ultra-accommodating fiscal policy to support the economy.

Japan’s core CPI may climb around 2% in April, similar to other countries that are expected to see a peak in inflation rates around the same time, largely due to the effect of the increase in oil prices. Japan is a net energy importer and the current energy crisis is damaging the country’s terms of trade and overall economic health. The rising cost of oil is causing goods prices to rise in Japan, with oil imports accounting for 80% of the country’s oil consumption. 

On Thursday, calendar news includes the 30-y Bond Auction and the release of Leading Indicators. This is a composite index of 11 economic indicators that can predict the direction of the economy and show the country’s economic health status. 

USDJPY 1hr chart

TRADE JPY PAIRS

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Written by:
Myrsini Giannouli

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