Important calendar events
The dollar firmed on Monday, with the dollar index rising above 104.2. US Treasury yields retained Friday’s values as Monday was a Bank holiday, with the US 10-year bond yield rising to 3.83%. The dollar exhibited low volatility on Monday, despite an important breakthrough in the US debt ceiling deal. Monday was US Memorial Day, and no fundamentals were released for the US.
The ongoing debate around the US debt ceiling has been causing economic uncertainty, affecting dollar prices. US Treasury Secretary Janet Yellen has warned that the office would not meet all US government obligations by June 5th. This would force the country to default on its debt, leading to a major recession.
US President Joe Biden and Republican House Speaker Kevin McCarthy have been negotiating a deal that would raise the government's debt limit, preventing the US from going into default. Talks between the Democrats and the Republicans pushed into the weekend and the two parties announced that they have reached a tentative agreement to suspend the federal government's $31.4 trillion debt ceiling. The deal, however, will have to be approved by Congress before the US runs out of resources to meet its obligations.
The dollar soared last week on upbeat US economic data. GDP data released last week showed that the US economy expanded by 1.3% in the first year of 2023 against predictions of a 1.1% growth. The preliminary GDP Price Index, which is an important inflation gauge, also exceeded expectations, rising by 4.2% in Q1 of 2023 versus the 4.0% anticipated. US Unemployment claims dropped to 229K last week, against more pessimistic estimates of 249K.
US Federal Reserve Chair Jerome Powell has indicated that the US Central Bank may pivot towards a more dovish direction. The Federal Reserve raised interest rates by 25 basis points at its latest monetary policy meeting, bringing the benchmark interest rate to a 16-year high target range of 5.00% to 5.25%.
Markets anticipate a pause in rate hikes in June. 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.
US 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.
US Core PCE Price Index, however, rose 0.4% every month in April versus a forecast of 0.3%. Core PCE, which is the Fed’s primary inflation gauge, went up by 4.7% year-on-year in April, having gained by 4.6% in March. Inflationary pressures in the US remain sticky, suggesting that the Fed may have to persist on its policy of monetary tightening to restore price stability.
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.
EUR/USD extended losses on Monday, dropping to the 1.070 level. If the currency pair goes up, it may encounter resistance near 1.083. If the EUR/USD pair declines, it may find support at 1.070.
The ECB raised interest rates by 25 bp at its latest monetary policy meeting, 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 ECB has 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.
ECB President Christine Lagarde has stated that the ECB is approaching a key juncture and that further action is necessary to bring inflation down to the bank’s 2% goal. Lagarde’s comments point to further rate hikes up ahead, while the US Fed has signaled a pause in rate hikes.
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.
GDP Flash data for the first quarter of the year showed that the Eurozone economy expanded by 0.1%, registering a small improvement against the 0 print for the final quarter of 2022.
The Sterling traded sideways against the dollar on Monday and the GBP/USD pair oscillated around the 1.235 level with low volatility. If the GBP/USD rate goes up, it may encounter resistance near 1.248, while support may be found near 1.230.
Headline inflation in the UK dropped below 10% on an annual basis in April for the first time since August 2022. CPI data released last week revealed that inflation in the UK is starting to cool, although not as rapidly as anticipated. Headline inflation rose 8.7% year-on-year in April from 10.1% in March, surpassing expectations of 8.2%. Core CPI, which excludes food and energy, however, rose to 6.8% on an annual basis in April from 6.2% in March.
BOE governor Andrew Bailey has warned that inflation in the UK is persistent and will require further tightening to bring inflation to target. The BOE raised interest rates by 25 basis points at its latest meeting in May, bringing the bank rate to 4.5%. 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.
The British economy contracted by 0.3% in April, after registering stagnation in March. The International Monetary Fund, however, upgraded the UK’s growth prospects stating that a recession was now unlikely. The IMF had previously forecasted that the British economy will contract by 0.6% this year.
The UK’s weak 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 rallied on Monday, and USD/JPY retreated below 140.5. If the USD/JPY pair declines, it may find support near 137.4. If the pair climbs, it may find resistance at 142.5.
BOJ Core CPI rose to 3.0% year-on-year in April from 2.9% in March. April’s print exceeded expectations of a 2.8% growth, indicating that price pressures in Japan continue to rise. Tokyo Core CPI for April was also hotter than expected, at 3.5% annually, 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.
Preliminary GDP data for the first quarter of the year were optimistic, showing that the Japanese economy expanded by 0.4% in Q1 of 2023, after reaching stagnation during the last quarter of 2022. The GDP data exceeded expectations of a 0.2% growth in the first quarter of the year, alleviating recession concerns for Japan. The final GDP Price Index printed showed a 2.0% annual expansion, versus 1.2% the previous quarter. Japan’s economic recovery increases the odds of a hawkish pivot in BOJ’s monetary policy.
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.
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Written by:
Myrsini Giannouli
présence dans l'industrie en tant que fournisseur de liquidités
et une exécution fiable
séparés
de premier ordre
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