Dollar rallies on robust US economic data

Important calendar events

• Oil: OPEC-JMMC Meetings
• USD: ADP Non-Farm Employment Change, Unemployment Claims, FOMC Member Mester Speech
• EUR: Spanish Unemployment Change, Monthly PPI, Spanish 10-y Bond Auction, French 10-y Bond Auction

USD

The dollar has been slipping for the past couple of weeks, with the dollar index retreating to 101.3. The dollar rallied this week though and the dollar index climbed above 102.5% on Wednesday. Bond yields also rose on Wednesday, 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, realrealizingir profits. 

This week though, the dollar is regaining its strength, supported by robust US economic data and hawkish Fed rhetoric. US Manufacturing PMI data were released on Wednesday, which are important indicators of economic health. The PMI data were higher than expected, showing that the US economy is moving in a positive direction and that the manufacturing industry is expanding. In addition, JOLTS Job Openings employment data were released on Wednesday and revealed that job openings exceeded expectations, although they were lower than last month. 

FOMC members Bullard and Williams delivered speeches on Wednesday, which were overall hawkish, supporting the dollar. Bullard emphasized in his speech that Fed rate hikes must follow market expectations, as markets have already priced in several rate hikes. 

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 ADP Non-Farm Employment Change and Unemployment Claims are scheduled to be released on Thursday and may affect the dollar as the jobs sector has a considerable impact on Fed policy. FOMC members' speeches may also cause some volatility in the dollar on Thursday, as the Fed now seems to be moving at a more conservative pace, halting the currency’s rally.

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EUR 

The Euro plummeted on Wednesday, as the dollar strengthened, with the EUR/USD rate falling below 1.065. If the currency pair goes up, it may encounter resistance at 1.064 and higher up at 1.093. If the currency pair falls, it may encounter support at the 1.036 level which represents the 2016 low, and further down near a 20-year low of 0.985.

Manufacturing PMI data were released on Wednesday for some of the Eurozone’s leading economies and the Eurozone as a whole. PMI data are important indicators of economic health but were overall mixed for the EU economies. German sales data and Eurozone PMI were weak, failing to support the Euro. In addition, ECB President Christine Lagarde delivered a speech at a conference on Wednesday but did not provide new insight into the ECB’s monetary policy in her speech. 

In addition, EU members have finally reached an agreement on banning Russian oil imports. Concerns about rising energy costs in the EU 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 eco,nomy 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. 

Several economic and employment indicators are scheduled to be released on Thursday for some of the Eurozone’s leading economies and the Eurozone as a whole and may have some impact on the Euro. 

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GBP 

The sterling fell this week, as the dollar rallied. GBP/USD plummeted on Wednesday, falling to 1.247. 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 are Bank Holidays in the UK. No major announcements are scheduled ahead of the weekend and low volatility is expected in the sterling. 

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JPY

The Yen plummeted this week, with the USD/JPY pair climbing above the 129.8 resistance, trading above the 130 level. 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.

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 yields approximately 0.24% interest rate as 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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Written by:
Myrsini Giannouli

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