The U.S. dollar index fell for the fourth week in a row, hitting a low of 100.779 since late April 2022, and was on track for its biggest drop (over 1%) since the week of Jan. 13, as traders added to signs that U.S. inflation may be cooling. Expectations that the Fed’s rate hike cycle is coming to an end.
The euro rose against the U.S. dollar for four consecutive days, rising by more than 1.4%, hitting a new high since early April 2022 to 1.1075. Interest rate differentials tend to favor the euro. Several ECB policymakers believe there is a case for the ECB to raise interest rates further, but offer differing views on how much more is needed.
Dollar weakens further
After the release of a strong U.S. non-farm payrolls report last Friday, the pendulum of market sentiment has swung back in favor of the Federal Reserve’s May meeting to raise interest rates. But economic data this week showed cooling U.S. inflation and a slowing labor market. It is expected that the interest rate hike cycle is coming to an end, and the dollar has further slumped.
The U.S. Consumer Price Index (CPI) in March and the U.S. Producer Price Index (PPI) in March increased by 5.2% and 2.7% year-on-year, respectively, the lowest since May 2021 and January 2021, respectively. Initial jobless claims were higher than expected last week. The signals suggest that the Fed’s previously aggressive rate hikes are working, with higher borrowing costs dampening demand.
Adam Cole, chief currency strategist at RBC Capital Markets, said: “The CPI rose close to expectations, so for a fairly consensus outcome, the market reaction was pretty big, which I think reflects how negative the sentiment on the dollar is right now. It’s kind of hard to fight, and even if you don’t agree, we don’t agree.”
Adam Button, chief foreign exchange analyst at ForexLive, said: “We are returning to a world of low inflation, and that is the message of the market now. The next big trading factor is that the inflation scare is over.”
The minutes of the Fed’s March meeting mentioned that Fed staff expected a “moderate recession” later this year, followed by a recovery in 2024-2025. That raised recession fears and weighed on the dollar.
The interest rate futures market predicts that the possibility of the Fed raising interest rates by 25 basis points in May to the range of 5.00%-5.25% is 67.2%. At the same time, it is expected that the Fed will start to cut interest rates from July, and the federal funds rate range will fall at 4.25%-4.50% by the end of the year.
big play in euro
The euro rose against the U.S. dollar for four consecutive days, rising by more than 1.4%, hitting a new high since early April 2022 to 1.1075. Several ECB policymakers believe there is a case for the ECB to raise interest rates further, but offer differing views on how much more is needed. The sources said policy makers were moving closer to agreeing on a 25 basis point hike in May, although other options were still on the table.
European Central Bank Governing Council member Vasle (Bostjan Vasle) said that given the stubbornly high underlying inflation rate, the need to continue to raise interest rates, the next move may be to raise interest rates by 25 basis points or 50 basis points.
ECB policymaker Pierre Wunsch said: “The policy decision in May was to raise rates by 25 or 50 basis points, but the size depends very much on core inflation in April.” He further added that the market is pricing in terminal interest rates. is reasonable, but may not cut rates quickly after that.
Ben Laidler, global market strategist at eToro, said the euro was boosted by the relatively more hawkish European Central Bank, which is expected to continue raising interest rates to tackle inflation. “We’ve seen dramatic moves in interest rate differentials in favor of the euro.”
Sources said ECB policymakers tended to agree on a 25 basis point hike in May. The central bank has raised rates by at least 50 basis points at each of its six consecutive meetings, but sources say uncertainty remains high following last month’s financial sector turmoil, and past hikes have not yet fully felt the effects of which, so there is no need to Such a large rate hike.
The market believes that the ECB will raise interest rates by 75 basis points by September, but investors are divided on whether to raise interest rates in two or three. While a quarter-point rate hike on May 4 is fully priced in, bets on a bigger rate hike have been rising in recent days.
Bank of Japan’s new governor rejects change
The dollar rose about 0.5 percent against the yen, having hit a fresh four-week high of 134.041 during the session. Kazuo Ueda, the new governor of the Bank of Japan, took office. He said he wanted more time to judge whether wage growth would be sustained enough to keep inflation steady at the central bank’s 2% target, suggesting he would not rush to scale back massive stimulus.
New Bank of Japan Governor Kazuo Ueda vowed at his inauguration news conference on Monday to maintain a massive stimulus program including yield curve control (YCC), denting market bets for an immediate policy shift.
But analysts say big wage hikes promised by Japan’s biggest companies this year and a rebound in private consumption raise the chances that inflation will remain high, casting doubt on the Bank of Japan’s view that its inflation target is unsustainable.
“I think the BOJ should adjust the YCC at the April meeting, which is good timing, especially since Japanese companies will raise wages after wage negotiations,” said Takayuki Miyajima, senior economist at Sony Financial Group.
Ulrich Leuchtmann, head of foreign exchange and commodity research at Commerzbank, said what Zhitian said was by no means positive for the yen, as he stressed that he would continue the ultra-expansionary monetary policy of his predecessor. The indicator in this regard is yield curve control (YCC), which is the first element to change before exiting. However, Ueda rejects this change.
Leuchtmann pointed out that long-term appreciation of the yen is only possible if it departs from current monetary policy. Otherwise, here’s what it means: If the BOJ waits too long, the yen could be vulnerable despite higher (real) yields. After the current inflationary shock dissipates, real yields in the rest of the world will return to low levels. Followers of this view may not be overly pessimistic, as the yen’s real yield disadvantage would be fairly modest in such a scenario.
Aussie gets a double boost
AUD/USD hit a new intraday high of 0.6796 since February 24 and is expected to gain nearly 1.7% this week. Australia’s March jobs report was strong, with the number of employed rising by 53,000, beating expectations for a gain of 20,000. Markets are starting to price in a 25 basis point rate hike from the RBA at its next meeting in May.
Upbeat data from China was also positive for the Australian dollar. Exports in U.S. dollar terms unexpectedly rose 14.8% year-on-year in March, China’s General Administration of Customs said on Thursday, compared with a median survey forecast for a 7% decline and the fastest pace since July 2022. That added to hopes that global inflationary pressures are easing.
The International Monetary Fund (IMF) held its spring meeting. Srinivasan, director of the IMF’s Asia and Pacific Department, urged Asia to tighten monetary policy for a longer period of time, saying the restart of China would underpin Asia’s recovery.
Ray Attrill, an analyst at National Australia Bank, said: “It’s almost a perfect storm of good news for the Australian dollar, starting with the employment data, and the Chinese trade data that looks particularly good, coupled with a weaker dollar and improved risk appetite. , which is a series of good news for the Australian dollar.”
Analysts at the Canadian Imperial Bank of Commerce pointed out: “We maintain the view that the Australian dollar will strengthen in the future. This is mainly based on our forecast for a weaker dollar and the continued reopening of the Chinese economy. Earlier this month, the Reserve Bank of Australia announced that it would keep policy interest rates at At 3.60%, while playing down the rhetoric that more rate hikes are needed. However, as we maintain firm expectations for upcoming inflation data and RBA Chairman Philip Lowe remains hawkish, a 25% hike is expected in early May In general, the US dollar fell across the board, coupled with China’s continued demand for Australian exports, the Australian dollar is expected to continue to be boosted in the medium term.”