Important calendar events
The dollar rallied on Thursday and the dollar index touched the 102.4 level. US Treasury yields gained strength on Thursday on increased Fed rate hike expectations, with the US 10-year bond yielding 3.80%.
The U.S. Federal Reserve kept its interest rate steady at its policy meeting last week for the first time in well over a year. Fed officials have voted to keep the central bank’s interest rate at a target range of 5.00% to 5.25%.
The Fed has signaled that its tightening cycle is not over yet and that its peak rate might be higher than anticipated. The purpose of suspending rate hikes is to give policymakers time to assess the pace of cooling inflation. Many economists believe that the Fed may resume rate hikes as early as July if inflation remains sticky. The Fed has warned that additional firming may be appropriate.
Fed Chair Jerome Powell delivered his much-anticipated testimony about the Semi-Annual Monetary Policy Report this week before the House Financial Services Committee. His testimony came in two parts and was delivered on Wednesday and Thursday. Powell’s speech on Wednesday had hawkish undertones, pointing to further rate hikes up ahead. Powell stated that inflation still has a long way to go, increasing the odds of another rate hike in July’s meeting. Powell resumed his testimony on Thursday along the same lines, stressing the need to bring US inflation down. Power said on Thursday that a strong majority of FOMC members feel that interest rates should go up further and hinted at the possibility of two more rate hikes.
US Headline inflation dropped sharply to 4.0% year-on-year in May, from 4.9% in April. US Inflation cooled more than expected in May, as markets were anticipating a 4.1% print. Core CPI, on the other hand, which excludes food and energy, remained sticky at 0.4% every month and 5.3% on an annual basis. US headline inflation dropped to its lowest point since March 2021 after 12 consecutive months of declines. Easing inflation enhances the odds of a pause in rate hikes at Wednesday’s Fed meeting.
US Producer Price Index data last week confirmed that US inflation is starting to ease. PPI declined by 0.3% in May, against expectations of a 0.1% drop and a 0.2% growth in April. Annual PPI dropped from 2.3% to 1.1%, while core PPI fell from 3.2% to 2.8% year-on-year, beating estimates of 2.9%.
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, exceeded expectations, rising by 4.2% in Q1 of 2023 versus the 4.0% anticipated.
Flash Manufacturing and Services PMI data are due on Friday and may affect the dollar, as these are important indicators of economic activity.
The Euro gained strength against the dollar on Thursday, with EUR/USD reaching its highest point this month of 1.100. If the currency pair goes up, it may encounter resistance near 1.108. If the EUR/USD pair declines, it may find support at 1.073.
The ECB raised interest rates by 25-bp last week, bringing its main refinancing rate to 4.00%. The ECB has signaled that further rate hikes are required as inflationary pressures in the EU remain high. The ECB revised upwards its inflation forecasts for 2023, 2024, and 2025 by one-tenth of a percent, to 5.4%, 3.0%, and 2.2%, respectively. Higher inflation projections raised expectations for additional monetary tightening.
ECB President Christine Lagarde delivered a hawkish press conference following the policy meeting, pointing to further rate hikes. Lagarde hinted that another rate hike in July is likely as inflation in the Eurozone is sticky. Lagarde’s comments point to further rate hikes up ahead, while the US Fed has signaled a pause in rate hikes.
Headline inflation in the Eurozone cooled to 6.1% year-on-year in May from 7.0% in April, beating expectations of 6.3%. Core Inflation, which excludes food and energy, also slowed to 5.3% on an annual basis in May versus 5.6% in April and 5.5% forecast. The latest inflation print is showing that the ECB’s efforts to bring inflation down are paying off, but it will likely not be sufficient to induce the central bank to abandon its hawkish policy just yet.
GDP data for the first quarter of the year showed that the Eurozone is technically entering a recession. Revised GDP showed a contraction of 0.1% for Q1 of 2023, in contrast to the Flash GDP data released earlier which showed an expansion of 0.1%. Deteriorating economic conditions in the Eurozone may force the ECB to rethink its hawkish monetary policy.
Flash Manufacturing and Services PMI data are scheduled to be released on Friday for some of the Eurozone’s leading economies and the EU as a whole. These are strong indicators of economic activity and may affect the Euro.
The Sterling exhibited high volatility on Thursday after the BOE raised interest rates by 50 bps. The Sterling was volatile after the BOE policy meeting, with GBP/USD ranging from 1.273 to 1.281. If the GBP/USD rate goes up, it may encounter resistance near 1.285, while support may be found near 1.248.
The BOE raised interest rates by 50 basis points in an unexpected move on Thursday, bringing the bank rate to 5.0%. British policy members voted 7-2 to raise the bank’s interest rate to its highest level since 2008, with two of its members voting to keep rates at 4.5%. Markets were anticipating a 25-basis point rate hike this week, and the Sterling rose sharply after the rating announcement but pared gains later in the day.
Sticky inflation in the UK is putting pressure on BOE policymakers to increase interest rates. The MPC warned that if price pressures remain persistent, further tightening would be required. BOE Governor Andrew Bailey warned that inflation is taking a lot longer to come down than expected. Bailey also stressed after the policy meeting that unsustainable wage rises were largely responsible for the 50-bp rate hike. Labor shortages in the UK have pushed up wage growth, increasing inflationary pressures.
The BOE is expected to continue to increase interest rates in the coming months as it fights to bring inflation down. The BOE has been following an aggressively hawkish monetary policy, aiming to bring inflation down. As the US has paused rate hikes, BOE interest rates are now almost on par with Fed rates, boosting the Sterling.
Headline inflation in the UK remained unchanged at 8.7% year-on-year in May according to CPI data released on Wednesday. UK inflation remains sticky, exceeding expectations of a drop to 8.4%. Core CPI, which excludes food and energy, was also hotter than anticipated in May. Core CPI rose to 7.1% annually from 6.8% in April, versus 6.8% expected. This is much higher than the BOE’s goal of 2% and public confidence in the BOE’s efforts to curb inflation has fallen to its lowest level on record.
Britain’s economy expanded by 0.2% month-on-month in April after a contraction of 0.3% in March. GDP grew by 0.1% for the 3-month figure to April pointing to slow growth, and cooling recession concerns.
Several important economic activity indicators are due on Friday for the UK, including GfK Consumer Confidence, Retail Sales, Flash Manufacturing PMI, and Flash Services PMI. These may cause volatility in the price of the Sterling in the wake of Thursday’s BOE policy meeting.
The Yen extended losses on Thursday and USD/JPY touched 143.3, its highest level since November 2022. If the USD/JPY pair declines, it may find support near 138.7. If the pair climbs, it may find resistance at 145.
The Yen has been retreating in the past few weeks, weighed down by the BOJ’s persistently dovish policy. Japanese authorities, however, have stressed that they are monitoring the Yen’s decline and may intervene to boost the currency against excessive short-selling.
The BOJ maintained its ultra-accommodating monetary policy last week and the Yen retreated after the BOJ policy meeting. The BOJ held its short-term interest rate target steady at -0.10% and kept its yield curve control program unchanged. The BOJ signaled it is in no rush to change its dovish stance despite rising inflation rates.
BOJ Governor Kazuo Ueda stated after the meeting that even though price pressures are expected to grow over the next few months, there is high uncertainty about next year's wage growth. Ueda also stressed that more time is needed until the bank’s 2% inflation target became sustainable.
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% on an annual basis, against expectations of a 3.2% print. Inflation in Japan remains steadily above the BOJ’s 2% target, putting pressure on businesses and households. National Core CPI data are scheduled to be released on Friday for Japan and may affect the BOJ’s future policy direction.
Final GDP data for the first quarter of the year released last week showed that the Japanese economy expanded by 0.7%, against a preliminary GDP print of 0.4%. The GDP data exceeded expectations, 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.
National Core CPI and Flash Manufacturing PMI data are scheduled to be released on Friday for Japan and may cause volatility in the price of the Yen.
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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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