Friday May 24 2024 16:03
6 min
The US dollar was poised for its largest weekly gain in a month and a half on Friday, driven by unexpectedly strong US economic data that has heightened market concerns about US inflation and interest rates.
US business activity surged to its highest level in over two years in May, with manufacturers reporting rising input prices, leading to a retreat in expectations for US interest rate cuts and a rise in government bond yields.
The dollar is up nearly 1% this week against the Japanese yen, reaching 157.04 JPY, despite Japanese government bond yields also rising to decade highs, clearing 1% at the 10-year tenor.
In Japan, core inflation slowed for a second consecutive month in April, aligning with market expectations and remaining above the central bank's target at 2.2%.
Martin Whetton, head of financial markets strategy at Westpac in Sydney, told Reuters:
"It's having very little effect on the yen. The carry of holding dollars is far juicier”.
US policymakers' rhetoric has also made traders nervous about inflation and the risk rate cuts would be distant or small.
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Minutes from the Federal Reserve's last meeting, released this week, revealed ongoing debate among policymakers about whether current rates are sufficiently restrictive to curb inflation.
Traders have now shifted the anticipated timing of the first Fed rate cut to December.
Only 36 basis points of cuts are priced in for 2024, down from 50 basis points (equivalent to two quarter-point cuts) a week ago.
Business surveys from S&P Global on Thursday reinforced the belief among many traders that the Fed may keep interest rates “higher for longer”.
Markets.com Chief Market Analyst Neil Wilson offered his thoughts on global inflation rates in a morning note last Tuesday, opining that central banks may have no alternative but to accept higher structural inflation going forward:
“Inflation is falling – but copper, gold, silver, etc. did not get the memo. Markets think the Fed and ECB are throwing in the towel and inflation will go higher again. As I have said many times, CBs are in a bind: they are going to tacitly and then explicitly accept higher structural inflation. This was evident since the Fed went for AIT (average inflation targeting)”.
The euro recovered from a nine-month low against the pound on Thursday, aided by a key European wage indicator's rise. However, the moves were modest, and the European Central Bank (ECB) noted one-off factors contributing to the wage increase in a blog post. Rates markets still predict a near 90% chance of an ECB interest rate cut next month, as per data cited by Reuters. The euro was up 0.3% at $1.0843 but remained down nearly 0.5% for the week.
Sterling held around two-month highs, with GBPUSD trading at $1.2745, despite weak UK retail sales.
The US dollar index, which measures the strength of the greenback against a basket of six major currencies, was up nearly 0.6% for the week, just shy of 105, marking its largest one-week rise since mid-April.
Francesco Pesole, an FX strategist at Dutch bank ING, wrote that the US dollar would likely maintain its position throughout the upcoming Memorial Day weekend.
The bank was also “bullish” on the dollar to yen pair, with Pesole saying USDJPY may move to 158.0 “in the coming days”:
“Hawkish Federal Reserve minutes and the consequent cooling off in global risk sentiment allowed for a moderate restrengthening of the dollar across the board, offsetting some domestic developments that – as in the case of EUR and GBP – pointed in the other direction. Today is the last trading session before a long weekend in the US, with markets closed on Monday for Memorial Day. [...]
We don’t see a strong argument for directional changes in the dollar crosses today. Domestic stories should remain central amid a relatively quiet US calendar and the Memorial Day break. We also maintain our bullish bias on USD/JPY as markets remain carry-oriented and the slowdown in Japan’s core CPI (released overnight) endorses the rather cautious pricing for further Bank of Japan rate hikes (25bp by year-end). Markets should continue to test Japan’s FX intervention tolerance, and a move to 158.0 looks very much possible in the coming days”.
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Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.
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