Important calendar events
The dollar has been slipping for the past couple of weeks, with the dollar index retreating to 101.3. The dollar rallied this week and the dollar index climbed above 102.5% on Wednesday but slipped to 101.8 on Thursday. Bond yields firmed on Thursday though, with the US 10-year treasury note yielding above 2.9%.
The dollar has been retreating for the past couple of weeks, pushed down by a mix of negative US economic data and unstable market sentiment. The USD had been trading in overbought territory and its high price has tempted traders to close long positions, realizing their profits.
Earlier this week the dollar was supported by robust US economic data and hawkish Fed rhetoric. On Thursday though, US ADP Non-Farm Employment Change and Revised Nonfarm Productivity data were below expectations, putting pressure on the dollar, as the jobs sector has a considerable impact on Fed policy. US payrolls increased far less than expected in May, indicating that demand for labor is slowing. Fed member Mester in her speech on Thursday emphasized the need for multiple rate hikes of 50 bps each, confirming that the Fed intends to move at a steady but decisive pace in the coming months.
The dollar has been boosted by hawkish Fed policy for the past couple of months. In its latest monetary policy meeting, the US Federal Reserve raised its benchmark interest rate by 50 base points to 1%. Fed rhetoric has become more cautious though, as inflation woes were balanced out by recession fears. FOMC members point to a series of rate hikes of 50 base points each, confirming that the Fed intends to move with a gradual but steady pace towards monetary policy normalization.
Continued Russian hostilities against Ukraine have increased risk-aversion sentiment, providing support for the safe-haven dollar. As there is still no end in sight to the crisis, the dollar’s appeal as an investment remains high, although risk appetite seems to be gradually returning to markets.
US ISM Services PMI data are scheduled to be released on Friday, which are important indicators of economic health. Non-Farm Employment Change and Unemployment Rate Employment data are also scheduled to be released on Friday and are expected to affect the dollar.
The Euro climbed on Thursday, as the dollar weakened, with the EUR/USD rate climbing to 1.074. If the currency pair goes up, it may encounter resistance at 1.093. If the currency pair falls, it may encounter support at the 1.036 level that represents the 2016 low, and further down near a 20-year low of 0.985.
Several economic and employment indicators were released on Thursday for some of the Eurozone’s leading economies and the Eurozone as a whole. Overall, the data were mixed for the EU economy, indicating that economic growth in the EU has stalled. Even though the ECB has pointed clearly to a shift towards a more hawkish policy, stagnating Eurozone economies limit the ECB’s flexibility to increase interest rates to combat high inflation.
In addition, EU members have finally reached an agreement on banning Russian oil imports. Reports that Russia might retaliate by cutting off natural gas supplies in the EU are fueling fears of a potential energy crisis in Europe. Concerns about rising energy costs in the EU that would bring inflation even higher up are driving the Euro down.
The Euro has been regaining some of its lost ground against the dollar, as ECB and Fed policies seem to be converging gradually. The ECB has been hinting heavily at a July rate hike, while the Fed grows hesitant about moving forward with a more aggressive monetary policy. Rising inflation rates in the EU increase the chances that the ECB will go forward with a rate hike in July. The Eurozone economy, however, is still trying to recover from the pandemic and recession fears are growing in the EU.
Clear indications from the ECB that it would move towards a more hawkish policy this year, have boosted the Euro. Markets are now pricing in up to 105 base points rate hikes throughout the year. ECB President Christine Lagarde has pointed to rate hikes in Q3 of this year, which would bring the ECB’s interest rate at least to zero and possibly to positive territory. ECB members are starting to agree on a more hawkish policy starting in the third quarter of the year and the consensus between them seems to be that the ECB will perform its first rate hike in decades at its next policy meeting in July.
Services PMI is scheduled to be released on Friday for some of the EU’s leading economies and the Eurozone as a whole. PMI data are important indicators of economic health and may have a strong impact on the Euro.
The sterling rose on Thursday as the dollar weakened, with the GBP/USD rate climbing to 1.257. If the GBP/USD rate goes up, it may encounter resistance near the 1.308 level, while if it declines, support may be found near the two-year low at 1.206.
In the past couple of weeks, the sterling had been supported by a weakening dollar. This week, however, the dollar regained its strength. The pound, on the other hand, fell on weak UK economic data, indicating that the economic outlook for the UK remains discouraging.
The sterling has been losing 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, it has recently backed down and moderated its stance, weighted down by the still fragile British economy. In its latest monetary policy meeting, the Bank of England raised its benchmark interest rate by 25 base points, bringing its rate to a 13-year high of 1%.
Headline inflation in the UK rose to 9% in April, while core inflation hit 6.2%. Headline inflation reached a new 40-year high, highlighting the need for legislative action to tame soaring inflation rates. The cost of living in the UK has been increasing, driven primarily by the high cost of energy imports, putting pressure on UK households. Stagflation is a risk for the UK economy, as for many other countries, as economic stagnation coupled with rising inflation creates a toxic mix for the economy.
Thursday and Friday are Spring Bank Holidays in the UK. No major announcements are scheduled ahead of the weekend and low volatility is expected in the sterling.
The Yen plummeted this week, with the USD/JPY pair testing the 129.8 resistance on Thursday. If USD/JPY rises, it may find resistance at 131.35. If the USD/JPY declines, support might be found near the 127 level and further down at the 121.3 level. The Yen slipped on Wednesday, on weak economic data for Japan. The dollar recovered, buoyed by robust US economic data, making the Yen less appealing to investors.
Minor economic indicators released on Thursday were overall positive for the economy in Japan, providing some support for the currency early in the day. BOJ policy remains firmly dovish though, pushing the currency down. BOJ member Seiji Adachi indicated on Thursday that the Bank’s accommodative policy is set to continue, despite Japan’s CPI breaching the BOJ’s 2% target, reaching 2.1% for the first time in seven years. Japan’s rising inflation rates are mainly due to commodity and energy price rises rather than the result of a growing economy, burdening Japanese households.
The primary driver of the Yen over the past few months has been the BOJ’s fiscal policy, with the BOJ following an ultra-easy monetary policy to support the struggling economy. While other countries are moving towards quantitative tightening to return to pre-pandemic fiscal policies, Japan continues to pour money into the economy and maintains its negative interest rate. The difference in interest rates with other major Central Banks, especially with the Fed, puts the Yen at a disadvantage, driving its price down.
Bond yields have fallen across Japan’s treasury curve due to low demand. Japan’s 10-year government bond yielded a 0.24% interest rate at the bond auction on Thursday with a low number of bids made per bid accepted. The BOJ continues to buy an unlimited amount of Japanese treasury bonds, defending their current low yield. In contrast, the respective US 10-year bond is offered with a yield of approximately 2.8%, more than an order of magnitude higher than the Japanese bond. The large divergence in bond yields makes the low-yielding Yen less appealing to investors than the dollar, pushing its price further down.
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