Important calendar events
The dollar rallied on Thursday, with the dollar index rising above the 102 level. US Treasury yields, on the other hand, have been declining on increasing expectations of a pause in US rate hikes and the US 10-year bond yield dropped to 3.39%.
US employment data on Thursday were disappointing, putting pressure on the dollar. US Unemployment claims reached 264K from last week’s 242K, against expectations of a 245K print.
US PPI data on Thursday showed that price pressures are decelerating. PPI rose 0.2% in April against a decline of 0.5% in March and expectations of a 0.3% rise. Annual PPI increased 2.3% compared to expectations of a 2.5% rise, showing a decline from last month’s 2.7%. Core PPI, which excludes food and energy, printed 3.2% year-on-year, against expectations of 3.3%, dropping from last month’s 3.4%.
On Wednesday, US Consumer Price Index data showed that 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. Monthly CPI is forecast to rise 0.4% in April in line with expectations. Core CPI, however, which excludes food and energy, proved to be persistent, remaining at 5.5% year-on-year. The dollar dropped after the release of the CPI data, as slowing inflation increased the chances that the Federal Reserve could pause its interest rate hikes.
The Federal Reserve raised interest rates by 25 basis points at its monetary policy meeting last week, bringing the benchmark interest rate to a 16-year high target range of 5.00% to 5.25%. The FOMC statement released after the meeting was dovish, putting pressure on the dollar.
Markets interpreted the Fed’s statement as a clear sign of 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 first quarter of the year 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 inflation rose slightly in March. The core PCE Price Index, which is the Fed’s preferred inflation gauge, rose by 0.3% in March, in line with expectations. On an annual basis, core PCE increased by 4.6%, beating expectations for a 4.5% growth.
EUR/USD was volatile on Thursday and the EUR/USD pair tested the 1.090 level support. If the currency pair goes up, it may encounter resistance near 1.109. If the EUR/USD pair declines, it may find further support at 1.083.
ECB rhetoric this week has been especially dovish, providing support for the Euro. ECB’s Nagel stressed the need to increase interest rates further to combat sticky inflation. Similarly, ECB member Isabel Schnabel stated that the central bank needs to continue hiking rates until core inflation in the Eurozone declines sustainably.
The ECB raised interest rates by 25 bp at its 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 Federal Reserve also raised interest rates by 25 basis points last week. The Fed’s benchmark interest rate, however, is much higher, in a target range of 5.00% to 5.25%. The divergence between the Fed’s and the ECB’s interest rates is putting the Euro at a disadvantage.
The ECB 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.
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.
Preliminary GDP Flash data for the first quarter of the year rose to 0.1%, registering a small improvement against the 0 print for the final quarter of 2022. The print was lower than consensus estimates of a 0.2% growth, indicating very slow economic expansion in the EU.
The Sterling plummeted on Thursday, and GBP/USD dropped to 1.250. If the GBP/USD rate goes up, it may encounter resistance near 1.266, while support may be found near 1.243.
The BOE raised interest rates by 25 basis points on Thursday as expected. This was the 12th consecutive rate hike in the UK, bringing the bank rate to 4.5%. MPC members vote in favor of the rate hike with a 7-2 majority, with two members voting for interest rates to remain at their former level of 4.25%. BOE governor Andrew Bailey stated that the British economy is improving and that he expects GDP to grow modestly in 2023.
The BOE statement following the policy meeting was hawkish, emphasizing that further monetary policy tightening would be required if price pressures remain persistent. Market odds are in favor of more BOE rate hikes up ahead and many analysts predict no rate cuts at all within the year.
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. Even though inflation showed signs of cooling, it exceeded expectations of a 9.8% print. 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.
The Yen was volatile on Thursday and USD/JPY fluctuated wildly, rising to 134.8 and then plummeting to 133.7. If the USD/JPY pair declines, it may find support near 133.5. If the pair climbs, it may find resistance at 137.7.
The BOJ Summary of Opinions released on Thursday was more dovish than anticipated, putting pressure on the Yen. Japanese policymakers seem set to maintain its ultra-easy policy, despite recent reports that the BOJ plans to pivot to a more hawkish policy. The report released on Thursday summarized the opinions of BOJ officials at the bank’s latest meeting in April. BOJ members were in favor of continuing the current easy policy, given the uncertain global economic outlook.
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.
The Yen gained strength this week, boosted by hawkish BOJ rhetoric. BOJ Governor Kazuo Ueda stated on Tuesday that the central bank will end its yield curve control policy and then start shrinking its balance sheet provided that inflation can sustainably maintain the bank’s 2% target. Ueda stressed that Japan's economic outlook is improving, and inflation expectations remain high.
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.
Final GDP data for Q4 of 2022 have shown that the Japanese economy has reached stagnation. Japan’s economic outlook is poor, raising recession concerns for the world’s third-biggest economy. Final GDP Price Index printed slightly higher than expected, with a 1.2% annual expansion, versus the 1.1% predicted.
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