Every reporter: Zheng Buchun Every editor: Jia Yunke
The US dollar remained strong due to the high interest rate hike expectations, but it temporarily entered a pattern of small gains due to the excessive previous gains. The April CPI released by the United States on Wednesday is still ugly, but because the expectation of interest rate hikes has been met, it actually only supported the dollar slightly. The main influencing factors for the rest of the foreign exchange market this week are the US PPI released later on Thursday and the US import and export price index released on Friday, but these data are relatively less important than the CPI, so the foreign exchange market may be relatively quiet for the rest of the week.
U.S. CPI beats expectations again
The U.S. dollar remained strong and fluctuated this week. As of 16:00 Beijing time on Thursday, the U.S. dollar index temporarily reported 104.28 points, up 0.26%.
From the weekly point of view, the US dollar has pulled out six positive lines in a row, and there are obvious signs of overbought. Therefore, although the interest rate hike is expected to be strong, the trend of the US dollar has been fully digested, and it is difficult to get a stronger push for a while, so at most it can only Maintain the pattern of small step-by-step gains.
The market’s strong expectation of the Fed to raise interest rates is the main driving force for the dollar’s strength, while the driving force from the risk aversion has weakened recently, because the situation in Russia and Ukraine has remained the same.
On Wednesday, the United States announced that the CPI rose 8.3% year-on-year in April, which was higher than the expected increase of 8.1%. That’s a slight easing from March’s 8.5%, but still pretty scary in absolute terms. At the same time, the core CPI, which excludes volatile food and energy prices, rose by 6.2%, which was also higher than the expected increase of 6.0%.
High inflation means that consumers’ spending power will decline, which will eventually affect the economic prosperity and induce stagflation or even recession. Therefore, high inflation makes it very difficult for the Fed to deal with, because high inflation will definitely require faster rate hikes, which can damage the ability of economic growth in the long run.
A weak stock market could also hit consumption, or at least be a potential threat. A large number of people in the United States participate in the stock market through financial instruments such as pension funds, but the Dow has fallen by 14% recently, and the S&P 500 has fallen by 18%. If the stock market falls further, it may enter a bear market, at which time the “paper wealth” of the American people will be further eroded, thereby impacting both their consumer confidence and spending power.
Rate hike expectations rose slightly
After the above-mentioned price data was released, the market’s expectations for a one-time 75 basis point rate hike at the Fed’s interest rate meeting in June have increased, but it is still not particularly certain. That is to say, the market is not sure whether the next interest rate meeting will raise interest rates by 50 basis points or 75 basis points.
There are three main factors that cause the market to be uncertain: the first is the growing fear of recession, the second is that the Biden administration may be considering cutting import tariffs on Chinese products, and the third and most important reason is after the last interest rate meeting. Fed Chairman Jerome Powell seemed extremely reluctant to raise rates too much.
From the current point of view of most Wall Street analysts, they believe that although the CPI announced by the United States on Wednesday has raised the chance of raising interest rates by 75 basis points at the June interest rate meeting, they believe that the Fed will still raise interest rates by 50 basis points.
Still, the CPI data isn’t entirely out of action. Because of this CPI data, analysts are now greatly strengthening their expectations for a 50 basis point rate hike at the September interest rate meeting, and those who believe that a 25 basis point rate hike has almost disappeared. That is to say, analysts are constrained by Fed Chairman Powell’s remarks, so they have to postpone interest rate hike expectations. This logic feels a bit awkward, but it may be the most reasonable explanation at present.
Of course, future US economic indicators and changes in the international situation related to Russia and Ukraine are also extremely important. If a major event occurs in the future, then expectations may change.
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