Important calendar events
The dollar rallied last week, with the index rising above 103.5. The dollar’s ascent was arrested on Friday, however, after dovish Fed commentary drove the dollar index down to 102.3. US Treasury yields also followed an upwards trajectory, with the US 10-year bond yield rising to 3.7%. Diminishing rate hike expectations, however, lowered bond yields on Friday.
Fed rhetoric early last week was confusing, with some FOMC members favoring a continuation of the current hawkish policy and others hinting at a pause in rate hikes. US Federal Reserve Chair Jerome Powell caused a stir in markets last week, however, as his statements at a Fed conference in Washington indicated that the US Central Bank may pivot towards a more dovish direction. Powell indicated on Friday that, after 10 straight rate hikes, the Fed may be considering a pause in rate hikes in June. Powell remarked that “the risks of doing too much versus doing too little are becoming more balanced.” This was a marked shift from his stance earlier in the year, hinting at a pivot to a more dovish fiscal policy.
Last week, US employment data indicated that the labor market is showing improvement. Jobless claims unexpectedly fell to 242K from 264K previously, against expectations of a 251K print.
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. Core CPI, however, which excludes food and energy, proved to be persistent, remaining at 5.5% year-on-year. Slowing inflation increases the chances that the Federal Reserve could pause its interest rate hikes.
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 after May’s interest raise. 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.
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.
The ongoing debate around the US debt ceiling is causing economic uncertainty and may affect dollar prices. US Treasury Secretary Janet Yellen has warned that the office would not meet all US government obligations by June 1. Fears of a US debt default are putting pressure on the dollar. Last week, however, House Speaker McCarthy and President Biden started talks on the debt ceiling, which were considered to be productive. US President Biden stated that he is confident that he, and House Speaker McCarthy, will agree on the budget. The two officials will meet on Monday to discuss the issue further.
This coming week, US Flash Manufacturing and Services PMI data are due on the 23rd. The minutes of the latest Fed meeting are scheduled to be released on the 24th and may provide some insight into the Fed’s future policy direction. Treasury Secretary Yellen is also due to deliver a speech on the 24th, which may affect the dollar in case the issue of the US debt ceiling is mentioned. Preliminary quarterly GDP and GDP Price Index on the 25th may provide information on the state of the US economy and can cause volatility in dollar prices. Core PCE Price Index on the 26th is one of the most highly anticipated fundamentals this week, as it is the Fed’s preferred inflation gauge.
The EUR/USD pair extended losses last week as the dollar gained strength, ending the week near 1.080. If the currency pair goes up, it may encounter resistance near 1.109. If the EUR/USD pair declines, it may find support at 1.075.
The ECB raised interest rates by 25 bp at its latest monetary policy meeting last week, 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 rhetoric last week was hawkish, indicating that the EU central bank intends to keep raising interest rates. ECB President Christine Lagarde 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.
On the data front, several economic activity indicators will be released this week for the Eurozone. Flash Manufacturing and Services PMI data especially, are scheduled to be released on the 23rd for some of the Eurozone’s leading economies and the EU as a whole.
GBP/USD was volatile last week, dropping to 1.245 on Friday. If the GBP/USD rate goes up, it may encounter resistance near 1.268, while support may be found near 1.235.
UK labor data released last week put pressure on the Sterling. British unemployment went up to 3.9% in the three months to March and Claimant Count Change went up to 46.7K in April from 26.5K in March, against expectations of a 31.1 print.
BOE governor Andrew Bailey commented on the change in the job market, stating that Britain’s labor market is showing signs of reduced inflationary pressures. Bailey also stated that there are signs that pay growth could ease further later in the year. Bailey, however, stressed that the easing in labor market tightness is happening at a slower pace than anticipated. Signs of cooling inflationary pressures may encourage the BOE to halt its hawkish monetary policy.
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. After Bailey’s speech, however, the odds of another rate hike at June’s policy meeting went down.
The BOE has been following an aggressively hawkish monetary policy to bring inflation down. Inflation in the UK is still rampant, however, after more than a year of raising interest rates. British headline inflation remained above the 10% level in March, dropping to 10.1% year-on-year from 10.5% in February. Inflation in the UK has become entrenched, forcing the BOE to continue its policy of economic tightening against a weak economic backdrop.
The UK economy registered stagnation in March according to recent GDP data. Monthly GDP dropped to zero, falling below expectations of 0.1% expansion. In addition, the IMF has downgraded the UK’s growth forecast, predicting that the British economy will contract by 0.6% this year, which is also consistent with BOE forecasts. April’s GDP print will be released on Friday, a day after the BOE policy meeting.
The UK’s grim 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.
This week, UK Flash Manufacturing and Services PMI data on the 23rd may cause some volatility in the price of the Sterling. Important indicators of inflation are scheduled to be released on the 24th. BOE Governor Andrew Bailey is also due to deliver a speech on the 24th, which may affect the Sterling in light of his dovish comments last week.
The Yen lost strength against the dollar last week and USD/JPY was catapulted to its highest level since November, ending the week near 137.9. If the USD/JPY pair declines, it may find support near 132. If the pair climbs, it may find resistance at 138.7.
Increased risk-on sentiment last week drove the safe-haven Yen down. Productive talks between House Speaker McCarthy and President Biden on the US debt ceiling, alleviated fears of a US debt default, putting pressure on the Yen.
Preliminary GDP data for the first quarter of the year released last week were optimistic, providing support for the Yen. 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.
BOJ Core CPI rose to 2.9% in March on an annual basis from 2.7% in February. March’s print exceeded expectations of a 2.6% growth, indicating that price pressures in Japan continue to rise. National Core CPI remained unchanged at 3.1% year-on-year in March. Tokyo Core CPI for April was 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. Increased price pressures and wages, raise concerns of a wage-price spiral and may force the BOJ to pivot towards a more hawkish policy.
Gold prices exhibited high volatility last week, plummeting to $1,950 per ounce mid-week but paring some of their losses on Friday, ending the week near $1,977 per ounce. If gold prices increase, resistance may be encountered near $2,060 per ounce, while if gold prices decline, support may be found near $1,951 per ounce.
Gold prices have been predominantly directed by the dollar’s movement, as the competing gold typically loses appeal as an investment when the dollar rises. The dollar rallied last week, with the index rising above 103.5. The dollar’s ascent was arrested on Friday, however, after dovish Fed commentary drove the dollar index down to 102.3. US Treasury yields also followed an upwards trajectory, with the US 10-year bond yield rising to 3.7%. Diminishing rate hike expectations, however, lowered bond yields on Friday.
The Federal Reserve signaled a pause in rate hikes last week, causing the dollar to plummet and boosting gold prices. US Federal Reserve Chair Jerome Powell 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 monetary policy meeting last week, bringing the benchmark interest rate to a 16-year high target range of 5.00% to 5.25%. Many analysts predict that there is a high probability of rate cuts starting in November. Expectations of a shift to a more dovish policy provide support for gold prices.
The ongoing debate around the US debt ceiling is causing economic uncertainty and may affect gold prices this week. US Treasury Secretary Janet Yellen has warned that the office would not meet all US government obligations by June 1. Fears of a US debt default promoted a risk-aversion sentiment in the past couple of weeks, boosting the safe-haven gold. Last week, House Speaker McCarthy and President Biden started talks on the debt ceiling, which will continue on Monday. If the debt issue is resolved satisfactorily, gold prices may retreat further.
The recent crisis in the banking sector also reduced risk sentiment, raising the appeal of safe-haven assets. Fears of a banking sector meltdown enhance gold’s haven status.
Oil prices gained strength last week with WTI price closing near $72 per barrel on Friday. If the WTI price declines, it may encounter support near $66.7 per barrel, while resistance may be found near $83.4 per barrel.
Oil prices have been under pressure, as mounting economic risks reduce the oil demand outlook. Recession concerns run high and aggressive rate hikes stifle economic activity, putting a lid on oil prices. The potential of a banking sector meltdown has also reduced the oil demand outlook.
US Treasury Secretary Janet Yellen has warned that the office would not meet all US government obligations by June 1. The ongoing debate around the US debt ceiling is causing economic uncertainty, pushing oil prices down. Last week, House Speaker McCarthy and President Biden started talks on the debt ceiling, which will continue on Monday. US President Biden stated that he is confident that the two parties will agree on the budget. Expectations that US officials will agree on a new debt ceiling, alleviated fears of a US debt default, providing support for oil prices.
Oil prices were also boosted by diminishing rate hike expectations last week. US Federal Reserve Chair Jerome Powell indicated on Friday 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%. The US Central Bank has signaled that its hawkish policy is coming to an end, providing support for oil prices. As major central banks are winding down their hiking cycles, the oil demand outlook rises.
However, oil prices are supported by limited supply, as OPEC+ producers recently decided to reduce output by 1.1 million barrels per day to offset the drop in oil prices from the global banking crisis.
Most major cryptocurrency prices were stable last week, with Bitcoin prices exhibiting low volatility. The crypto market was supported by renewed risk sentiment last week as optimism prevailed on the looming US debt ceiling.
Risk sentiment fluctuates, causing volatility in risk assets. Mounting economic concerns put pressure on risk assets. The ongoing debate around the US debt ceiling is causing economic uncertainty, pushing cryptocurrency prices down. US Treasury Secretary Janet Yellen has warned that the office would not meet all US government obligations by June 1. Last week, however, US President Biden stated that he is confident that he, and House Speaker McCarthy, will agree on the budget. Growing debt ceiling optimism improved risk sentiment last week, providing support for cryptocurrencies.
Bitcoin traded sideways last week, oscillating around the $27,000 level. If the BTC price declines, support can be found near $25,800, while resistance may be encountered near $30,000. Reports that Tether, the largest asset-backed stablecoin, would invest up to 15% of its net profit into Bitcoin every month boosted Bitcoin.
Ethereum also traded sideways last week, fluctuating around the $1,810 level. If Ethereum's price declines, it may encounter support near $1,740; if it increases, resistance may be encountered at $2,017.
Signs that major central banks are starting to wind down their hiking cycles provide support for risk assets. 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%. The US Central Bank has signaled that its hawkish policy is coming to an end, boosting risk assets. US Federal Reserve Chair Jerome Powell indicated on Friday that the US Central Bank may pivot towards a more dovish direction.
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Written by:
Myrsini Giannouli
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