Important calendar events
The USD continued climbing on Monday, with the dollar index rising to 99.4, boosted by hawkish Fed rhetoric. In a recent speech, Fed Chair Jerome Powell stated that the Fed must move "expeditiously" to bring inflation under control and his speech pointed to a more aggressive monetary policy. He hinted that the Fed may perform a steeper rate hike in the future, going above the expected 25 base points and his speech has provided support for the dollar. Other Fed members have shown signs of encouraging a more hawkish fiscal policy these past few days, increasing the odds of a 50 bp rate hike at the Central Bank’s next meeting in May. Markets are anticipating total rate hikes of 175 base points within the year to tackle soaring inflation rates.
US treasury yields are climbing as rate hike odds rise, providing support for the dollar. The 10-year Treasury yields rose to a two-year high of 2.5% on Friday and remained above 2.4% on Monday, as investors anticipate a more aggressively hawkish Fed policy.
The dollar had dropped in the wake of the Federal Reserve's latest policy meeting in March, in which the Federal Reserve raised its benchmark interest rate by 25 base points, bringing its interest rate to 0.50%. The US Central bank is attempting to bring down inflation that has been rising at the fastest rate in 40 years. The 25-base point rate hike though was considered conservative and had already been priced in by markets. Recent statements by FOMC members though show a shift towards a more aggressively hawkish policy.
The dollar is considered a safe-haven currency and the crisis in Ukraine bolsters the currency, which rises when a risk-aversion sentiment prevails, as investors turn towards safer assets. Diplomatic negotiations between Russia and Ukraine continue and if the crisis is diffused, it may put pressure on the dollar.
The JOLTS Job Openings and CB Consumer Confidence data are set to be released on Tuesday for the dollar. These are economic and employment indicators and may cause some volatility in the dollar.
The EUR/USD rate climbed on Monday, even as the dollar strengthened. Last week, EUR/USD had dropped below the 1.100 level, as the Euro lost strength against the dollar. On Monday, the currency pair went up a little but is still in a downtrend. If the currency pair goes up, it may encounter resistance at 1.139 and further up at 1.148, while if it declines, support may be found at the 1.079 level.
Hawkish Fed statements have buoyed the dollar and supported US Treasury bond yields, putting pressure on the Euro. German Flash Manufacturing PMI and German Flash Services PMI were released last week, which are key indicators of economic health for the Eurozone’s leading economy. Overall, the PMI data were higher than expected, showing signs of recovery for the German economy, providing some support for the Euro.
Inflation data this week are expected to show price pressures continuing to rise in the Eurozone, with German headline inflation rising to 6.1% from 5.1% in February.
ECB President Christine Lagarde stated last week that inflation is expected to rise in the Eurozone, but will drop again in the long run. Lagarde further pointed out that ECB monetary policies will not be in sync with Fed policy, reiterating the ECB’s commitment to a more dovish policy than other central banks. Lagarde has also stressed that the ECB needs to remain flexible and may alter its monetary policy in response to unforeseen inflationary pressures arising from the war in Ukraine, but stated that the EU Central Bank is in no hurry to raise its interest rate.
The ECB has been pursuing a more cautious fiscal policy than other major Central Banks, although it has recently turned towards a more hawkish direction. The ECB has recently announced its decision to wind down its bond-purchasing program sooner than expected, placing the end of the bond-buying program in the third quarter of 2022, if financial conditions in the Eurozone allow it. The ECB is trying to avert a dangerous economic effect known as stagflation, the mix of economic stagnation and high inflation rates.
In addition, the European Central Bank has recently announced that it does not plan to raise its benchmark interest rate before the end of its bond-buying program in the third quarter of 2022. Many market analysts predict that the ECB will raise its interest rate by at least 30 base points in Q4 of 2022 and some predict a steeper rate hike of 50 bps, although so far, the ECB has been reluctant to move towards a rate hike. 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.
The sterling plummeted on Monday, spurred by a divergence in monetary policy between the Fed and the BOE. The pound lost ground, outperformed by the strengthening dollar, with the GBP/USD rate falling to 1.306. If the GBP/USD rate goes up, there may be resistance at the 1.341 level and further up near the 1.364 level, while if it declines, support may be found near the 1.300 level.
BOE Governor Andrew Bailey delivered a speech on macroeconomics and financial stability at an online event hosted by Bruegel on Monday. Bailey warned that the energy crisis in the UK is going to be stronger than in any year in the 1970s, stating that the energy shock to households was going to be ‘historic’. His speech was considered more dovish than expected, especially compared to the more hawkish Fed rhetoric of the past few days. 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.
Last week, UK finance minister Rishi Sunak announced his half-yearly budget update, amid pressure to increase government spending to mitigate the impact of the growing cost of living. The Office for Budget Responsibility set the 2022 GDP forecast to 3.8% from 6.0% and average inflation of 7.4% for the year with a peak rate of close to 9% in Q4. Sunak also announced tax reductions, although his statements were seen as cautious and failed to provide support for the pound.
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. Rising commodity prices and import costs in the UK, and especially the high costs of imported energy, are driving inflation rates even higher. Indicators of Consumer inflation released last week, showed the fastest pace of price growth in 30 years, with the CPI index reaching 6.2% and the core CPI 5.2 percent year-on-year in February.
Inflationary pressures are expected to culminate in April and the BOE has upped its forecast for inflation to a 7.25% peak in April. 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.
In its latest meeting in March, the BOE announced that it would raise 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. The BOE emphasized the role of the war in Ukraine to rising inflation rates that are driving its turn to a tighter fiscal policy. The BOE’s raise of its benchmark interest rate was highly anticipated though and had already been priced in by markets.
Financial data that are due to be released on Tuesday for the pound, include Mortgage Approvals, Net Lending to Individuals, and Monthly M4 Money Supply. These are minor economic indicators and are not expected to affect the currency considerably.
The Yen continued underperforming against the dollar on Monday, with the USD/JPY rate climbing to 125.1, before paring its gains. The USD/JPY is currently trading in an uptrend and is at its highest level since 2015. If the USD/JPY continues to rise, resistance may be found at the 2015 high of 125.8. If the USD/JPY declines, support might be found at 114.8 and further down at 113.4.
The Yen is depreciating against other currencies, causing concern in the government of Japan. The rising price of oil is of particular concern, with oil imports accounting for 80% of the country’s oil consumption.
On Monday, the Bank of Japan announced that it would continue its bond-buying scheme, in contrast to other major Central Banks, which are moving towards a tighter fiscal policy. The Yen dropped by over 2% following the BOJ’s announcement, as its policy is in stark contrast to the increasingly hawkish Fed policy.
The BOJ stated on Monday that it would buy an unlimited amount of Japanese Government Bonds with a maturity of up to ten years at 0.25% to stop rising global yields from pulling yields higher. Near the end of last week, Japan’s treasury yields rose sharply, with yields on 10-year Japanese government bonds climbing to a six-year high of 0.24%. Japanese bond yields had been on the decline for some time, and rising U.S. yields had taken the spread between the two markets to its widest since August 2019.
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%, with Bank of Japan Governor Haruhiko Kuroda stating that there is no need for Japan to raise interest rates at all. 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.
Low inflation rates in Japan and a weakening economy are steering the BOJ towards maintaining its dovish monetary policy. Inflation in Japan is far below the BOJ’s 2% goal, although as prices of imported goods and energy continue to increase, inflation may rise, while overall economic health declines. Japan’s core CPI may climb around 2% in April, similar to other countries that are expected to see a peak in inflation rates near the same time, largely due to increased 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 Yen is considered a safe-haven currency and is supported by the war in Ukraine. The Yen, however, has not picked up pace as much as other safe-haven assets, as the BOJ’s fiscal policy is keeping the currency down. If a diplomatic resolution to the crisis in Ukraine is reached, the Yen is expected to fall even further.
Important indicators scheduled to be released on Tuesday for the Yen, include The unemployment Rate and BOJ Summary of Opinions. The BOJ report includes the Central Bank’s projection for inflation and economic growth and is the primary tool the BOJ uses to communicate its economic and monetary projections to investors. The release of the report might cause some volatility for the yen, as investors digest the BOJ’s decision to renew its bond-buying scheme.
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