© Reuters. FX Alert: Weak economic data weighs on dollar, RBA still likely to raise rates on Tuesday
In the early Asian session on June 6, Beijing time, the U.S. dollar index fell slightly and is currently trading around 103.99. The U.S. dollar index climbed as high as 104.70 on Monday, before closing down 0.04% at 104.01. Earlier data showed that the U.S. services sector barely grew in May as new orders slowed, snapping an early rally sparked by strong job growth.
The Institute for Supply Management (ISM) said on Monday that the U.S. non-manufacturing purchasing managers’ index (PMI) fell to 50.3 last month from 51.9 in April. A reading above 50 indicates growth in the services sector, which accounts for more than two-thirds of the U.S. economy. Economists polled had forecast the non-manufacturing PMI to rise slightly to 52.2.
Comerica Bank chief economist Bill Adams said in a note that the more accurate signal in the jobs report “may come from rising unemployment rather than strong job growth.”
Data on Friday showed that the U.S. added 339,000 jobs in May, but the unemployment rate surged to a seven-month high of 3.7%, pointing to a slowing labor market. The dollar rose briefly after better-than-expected job growth boosted expectations that the Federal Reserve may continue to raise interest rates even as inflation remains elevated.
“Jobs continue to surprise on a large scale and the labor market remains very strong,” said Brian Daingerfield, head of G10 FX strategy at NatWest Markets.
According to CME Group’s FedWatch Tool, the market sees the best chance of the Fed keeping rates on hold in June, but traders of fed funds futures are pricing in a 65% chance of at least an additional 25 basis point rate hike by July .
Fed officials, including Jefferson, stressed that any decision by the central bank to keep its benchmark overnight interest rate unchanged at its upcoming meeting should not be taken as a sign that the central bank is done tightening monetary policy.
“You could argue that skipping a rate hike might be part of a slowdown in the tightening cycle rather than a pause in the tightening cycle,” Daingerfield said.
Fed officials are now in a quiet period ahead of their June 13-14 meeting. The next major U.S. economic report will be data on consumer price inflation for May, due on June 13.
The Australian dollar was higher ahead of the Reserve Bank of Australia’s interest rate decision on Tuesday. The Australian dollar rose to a high of 0.6638 against the US dollar on Monday, before closing up 0.18% at 0.6616. At 12:30 on June 6, Beijing time, the Reserve Bank of Australia will announce its interest rate decision.
Lee Sue Ann, an economist at UOB Group, said the latest Australian wages and employment data reinforced the bank’s view.That is, the RBA will keep the cash rate unchanged at 3.85% in June. However, there are some risks to this view, with the RBA likely to raise the cash rate again this year given recent inflation remains well above target; the Australian economy remains moderately resilient.
Wells Fargo analysts Erik Nelson and Jack Boswell on Monday recommended buying the AUD/USD and sterling, arguing that the market is underestimating the possibility of a rate hike.
They said: “In our view, the market pricing of the RBA looks too low, both directly and relative to other central banks.We expect the RBA to raise rates on Tuesday, and provided guidance for further interest rate hikes, resulting in an increase in terminal interest rate pricing of about 25 basis points, and the Australian dollar rose sharply. “
EUR/USD closed up 0.06% at 1.0711 on Monday, just above May 31’s 1.0635, the lowest since March 20. The poor economic outlook in the euro zone has kept the euro under pressure. However, the European Central Bank’s interest rate hike is expected to give the euro some support.
Deutsche Bank lowers euro zone GDP forecast to 0.5% in 2024 from 1% previously
The financial website Forexlive commented on the Sentix investor confidence data in the euro zone in June, saying that dragged down by negative expectations for Germany, investor morale in the euro zone was low. That clearly did little to quell recession fears, especially as manufacturing in Europe’s largest economy slumped sharply, showing significant weakness.
HSBC Global Research senior economist Fabio Balboni and chief European economist Simon Wells said in a note,The ECB is expected to hike rates by 25 basis points in June, taking the deposit rate to 3.5% and signaling further hikes。
The main forecast among economists at HSBC Global Research is that the ECB will raise the deposit rate to 4% by September, albeit with some caveats. They said the focus should shift from peak rates to how long the ECB intends to keep rates at peak levels, although they currently do not expect the ECB to give clear forward guidance in this regard.
USD/JPY reached 140.93 on May 30, the highest since November 23. The exchange rate then fell back, and the dollar/yen closed down 0.27% at 139.58 on Monday.
GBP/USD closed down 0.13% at 1.2433 on Monday. Stephen Gallo, global currency strategist at BMO Capital Markets, said that if UK inflation remains relatively high, he sees more downside potential for sterling than upside potential – because when central banks have more success in reducing inflation, their currencies will gain return.
Key stats and events for Tuesday
Summary of Institutional Viewpoints
1. UBS is bullish on GBP/CHF with an upside target of 1.15；
① UBS strategist Thomas Flury issued a strategic recommendation for long-term trading of GBP/CHF, with the goal of rising to 1.15. Flury said the recommendation was backed by strong technical indicators and solid fundamental support;
②The strategist believes that the fortunes of the pound have turned with the restoration of political stability and the Bank of England’s firmer commitment to fighting inflation;
2. Goldman Sachs: USD/TRY is expected to rise to 28 within 12 months;
① Goldman Sachs analysts raised their forecasts for the dollar against the Turkish lira in three, six and 12 months, citing increased pressure on the currency. Analysts currently expect 23 USD/TL in 3 months and 25 in 6 months (previously 21);
②Given the pressure on the lira, “the question now is when, not if, the lira will depreciate significantly”, and the probability of a one-off adjustment has increased;
3. Deutsche Bank: The risk-reward of the pound is inclined to the downside;
① Shreyas Gopal, foreign exchange strategist at Deutsche Bank, said: “Looking ahead, the pound should remain very sensitive to any negative repricing of UK real yields as core inflation dynamics in the UK start to emerge more prominently than in other major economies;”
② He added: “In our view, the risk-reward for the pound is tilted to the downside”;
4. CICC: It is expected that the year-end level of the US dollar index may be lower than 100;
① The research report of CICC believes that looking forward to the market outlook, the negative logic of the US dollar will eventually be gradually realized. Therefore, we judge that the downward trend of the dollar may also start in the second half of this year. First, against the background of fiscal and monetary contraction, the general direction of the US economy will still be slowing down. After the debt ceiling bill was passed, US fiscal spending was further restricted. The financial contraction brought about by the loss of bank deposits will suppress consumption and investment demand;
②The resilience of the US economy in the first half of the year came from the stronger-than-expected labor market supporting consumption. After inflation falls from a high level, the nominal income of enterprises slows down or is gradually transmitted to the labor market, which eventually leads to a rise in the unemployment rate;
③We believe that the Fed will eventually respond to the economic downturn. It may start the rate cut cycle in 2024 at the latest, but it is possible to communicate the conditions for monetary policy loosening to the market in the second half of 2023. This may trigger a further decline in U.S. bond yields, and the U.S. dollar may also fall below the consolidation range in the first half of the year;
5. Union Credit Suisse Research: Even if interest rates rise further, the Swiss franc may continue to decline;
①Union Credit Suisse Research said that although data on Monday showed that Swiss inflation eased in May, the Swiss National Bank appeared to raise interest rates further at its meeting on June 22, but the rate hike was unlikely to prevent the downward correction of the Swiss franc;
② The company’s analysts said in a report that the Swiss franc is still the second best-performing currency in the G10 against the US dollar so far this year, second only to the British pound, but its strength since the regional banking crisis in the United States in March is fading , and even if the domestic central bank raises interest rates again, it is unlikely to prevent USD/CHF from consolidating further above 0.91.