Important calendar events
The dollar continued rising on Thursday, with the dollar index surpassing its pandemic high of 2020 and reaching a 20-year record of 103.9. Yields also rose across the US treasury curve on Thursday, with the US 10-year treasury note rising to 2.9%.
Continued Russian hostilities against Ukraine have increased risk-aversion sentiment, providing support for the safe-haven dollar. The situation between Russia and Ukraine continues to escalate, as Russian President Vladimir Putin makes threats about using nuclear weapons, while he cuts off the gas supply to Poland and Bulgaria.
Several US economic indicators were released on Thursday, which include: Quarterly Advance GDP, Advance GDP Price Index, and US Unemployment claims. These are indicators of economic and employment activity in the US and were mostly mixed for the US economy, having little impact on the currency.
Over the past few weeks, Fed rhetoric has been one of the primary drivers of USD price, as the Fed signals a faster pace of policy tightening in the US. Markets are beginning to price in a steep rate hike of 50 base points at the Fed’s next policy meeting in May. Markets have been pricing in a total of over 225 base points of additional interest rate hikes this year, boosting the dollar.
US Federal Reserve Chair Jerome Powell’s recent statements are in favor of an aggressive rate hike. Powell stated last week that a 50 base point increase in the Fed’s benchmark interest rate is on the table for the Fed’s next policy meeting in May.
Several US key indicators are scheduled to be released on Friday, especially the Core PCE Price Index, which is the Federal Reserve's primary inflation measure and may influence the shape of the Fed’s monetary policy.
The Euro continued its decline on Thursday, with the EUR/USD rate trading near the 1.050 level, below a five-year low. If the currency pair falls even further, it may find support near the 2016 low around the 1.036 level. The outlook for the pair is bearish, but if the currency pair goes up, it may encounter resistance at 1.118.
Increased risk-aversion sentiment has boosted the dollar at the expense of other currencies, with the Euro suffering heavy losses this week after Russian President Vladimir Putin announced that Russia would suspend gas supplies to Poland and Bulgaria.
On Wednesday ECB President Christine Lagarde delivered a speech that was considered more hawkish than expected, stressing that the ECB will be following a different route than the Fed, but leaving the door open for a rate hike in July.
Soaring inflation rates in the EU increase the chances of an eventual shift towards a more hawkish policy. The ECB however, is hesitant to raise its interest rates, as the Eurozone economy is still struggling to recover from the effects of the pandemic. The ECB is trying to avert a dangerous economic effect known as stagflation, the mix of economic stagnation and high inflation rates. 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.
Many of the Central Bank’s members have repeatedly expressed concern about the high inflation levels in the EU and are in favor of taking immediate steps towards monetary policy normalization. ECB President Christine Lagarde is in favor of a more dovish stance, however, and has stated that Eurozone inflation is expected to rise in the following months, while economic growth is expected to stall. Even Lagarde however, has shown recent signs of wavering though, as rising inflationary pressures are forcing the ECB to act to drive inflation down.
Last week, Lagarde stated that there is a strong chance of an ECB rate hike within the year but warned other ECB members against making statements before policy meetings. On Tuesday however, one of the more hawkish ECB members, Martins Kazaks, stated that the ECB could start hiking its interest rates as early as July and pointed to 2-3 rate hikes within the year.
Several important indicators are scheduled to be released for the Eurozone this week, including French Consumer Spending, French and Spanish Flash GDP, Italian and German Preliminary GDP, Annual CPI Flash Estimate, and Core CPI Flash Estimate. These data provide a measure of economic activity for some of the Eurozone’s leading economies. The CPI data, in particular, are key inflation indicators and may impact the ECB’s monetary policy.
The sterling remained under pressure on Thursday and continued falling against the dollar, with the GBP/USD rate falling as low as 1.245. 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, further support may be found near the two-year low at 1.206.
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, 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.
Last week, BOE Governor Andrew Bailey stated that the BOE is walking a tight line between inflation and economic recession and warned of the risks of tightening monetary policy too fast. His comments were supported by economic data released last week, which showed that the British economy is sluggish and economic recovery is still a long way off. Retail sales and Flash Services PMI data last week were lower than anticipated increasing the chances that the BOE will adopt a more conservative policy to balance rising inflation against slow economic growth.
The cost of living in the UK has been increasing, driven primarily by the high cost of energy imports, putting pressure on UK households. Rising commodity prices and import costs in the UK are driving inflation rates higher, with headline inflation reaching 7%. UK inflation has hit a 30-year high and is expected to rise further in the coming months, with a peak rate close to 9% in Q4. Soaring inflation rates in the UK increase market expectations that the BOE will raise its benchmark interest again in the second quarter of 2022, after already lifting the Bank Rate from 0.1% to 0.75% in the past few months.
The Yen plummeted to a 20-year low on Thursday, following the BOJ’s monetary policy meeting. The USD/JPY traded above 131, its highest price in 20 years. The USD/JPY has been gaining strength these past few weeks, pushing past the resistance level of 2015 high at 125.8. If USD/JPY continues its ascend, it may find resistance at the 2002 high of 135.3. If the USD/JPY declines, support might be found near the 121.3 level and further down near the 118 level.
The primary driver of the Yen over the past few months has been the BOJ’s fiscal policy. Last week, the Yen has been pushed down by the persistently dovish stance of the BOJ. Bank of Japan officials acknowledge the impact on the Japanese economy from increased import costs due to the weak yen but persist in 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.
The BOJ announced its main interest rate on Thursday and released an outlook report, detailing the factors that shape its monetary policy. The Bank of Japan continued its ultra-accommodating policy and massive stimulus program. The BOJ also maintained its negative interest rate of -0.10%, in contrast to other Central Banks, which are moving towards a policy normalization after the pandemic and are raising their benchmark interest rates. The difference in interest rates with other major Central Banks, especially with the Fed, puts the Yen at a disadvantage, driving its price down.
The BOJ released a press conference after the conclusion of the meeting, with BOJ Governor Haruhiko Kuroda issuing a dovish statement that pushed the Yen to record lows. Kuroda vowed to continue the bank’s ultra-easy monetary policy, stating that the weakening Yen is not part of the BOJ’s considerations.
The BOJ also stated that it would continue to buy an unlimited amount of Japanese treasury bonds, defending their current low yield. Japan’s 10-year government bond yield is currently close to 0.25%, more than an order of magnitude lower than the respective US 10-year bond, which is offered with a yield close to 2.8%. The large divergence in bond yields makes the low-yielding Yen less appealing to investors than the dollar, pushing its price further down.
The safe-haven dollar is boosted by continuing Russian hostilities against Ukraine. The Yen is also considered a safe-haven currency but has been underperforming, despite an increased risk-aversion sentiment, and many investors have been doubting its safe-haven status.
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