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Market News Foreign exchange trading reminder: The dollar hit a new low in more than a week for three consecutive years, and the European Central Bank may be preparing to raise interest rates more significantly

Foreign exchange trading reminder: The dollar hit a new low in more than a week for three consecutive years, and the European Central Bank may be preparing to raise interest rates more significantly

In early Asian trading on May 18, the U.S. dollar index hovered around 103.3. The U.S. dollar fell for the third day in a row on Tuesday, continuing to fall from a 20-year high against a basket of major currencies, as investors’ rising risk appetite weakened the dollar’s appeal. The U.S. dollar index, which tracks the greenback against six major currencies, fell 0.9 percent to 103.22, its lowest level since May 6.

2022-05-18
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In early Asian trading on Wednesday (May 18), the U.S. dollar index hovered around 103.3. The dollar fell for the third day in a row on Tuesday, continuing to fall from a 20-year high against a basket of major currencies, as investors’ rising risk appetite weakened the dollar’s appeal. force. The U.S. dollar index, which tracks the greenback against six major currencies, fell 0.9 percent to 103.22, its lowest level since May 6.



"Market sentiment has improved significantly compared to last week, with most asset classes rebounding and reversing last week's trend, and as a result equities," Brad Bechtel, global head of foreign exchange at Jefferies, said in a note to clients. Up, fixed income assets sold off and almost every currency in the world was up against the dollar.”

The dollar remained sluggish after data showed U.S. retail sales rose strongly in April and motor vehicle sales climbed amid improving supplies and spending at restaurants, providing a major boost to the economy at the start of the second quarter.

The U.S. dollar index pared losses after Fed Chairman Jerome Powell said at a Wall Street Journal event on Tuesday that the U.S. central bank will “continue to push” to tighten monetary policy until inflation falls significantly.

The euro rose more than 1 percent against the dollar, extending a rebound from last week's five-year low that pushed the euro further away from parity with the dollar. The euro strengthened following hawkish remarks by Dutch central bank governor and member of the European Central Bank Governing Council Knott said that the ECB will not only raise interest rates by 25 basis points in July, but is also ready to consider a larger rate hike, If inflation is higher than expected.

"We think the euro's decline is starting to look excessive," said Shaun Osborne, chief currency strategist at Scotiabank.

Sterling also took advantage of a weaker dollar to jump 1.4 percent to its highest level since May 5, after strong U.K. labor market data bolstered expectations that the Bank of England will keep raising interest rates to fight inflation.

The Australian dollar, which is seen as a liquidity indicator of risk appetite, rose 0.8% against the dollar after minutes of its meeting released on Tuesday showed the Reserve Bank of Australia had considered a larger rate hike at its May meeting, strongly suggesting another hike in June. .

Wednesday Preview





At an uncertain time in the day, Germany hosted a meeting of G7 finance ministers and central bank governors.

Institutional view



Wall Street warns stock and bond liquidity is getting as bad as 2020

While the U.S. stock market has rallied, you can understand Wall Street's paranoia by looking at the features that characterize the illiquid bear trap. Trading conditions in stocks and bonds have gotten worse in recent months, as fund managers struggle to buy and sell large orders without affecting prices, much as they did during the 2020 pandemic collapse.

JPMorgan sees liquidity in S&P 500 futures, or how easy it is to trade, is worrying, even by the standards of the pandemic collapse more than two years ago. Market depth in U.S. Treasuries is also approaching historic dire levels in Goldman Sachs data. JPMorgan strategist Nikolaos Panigirtzoglou wrote in an email that market depth is not much better than it was in March 2020, meaning the market's ability to digest relatively large orders without significantly affecting prices is currently low.

While the trading woes of 2020 have begun to ease in just a few weeks, times have changed, and for many on Wall Street, the problem appears to have no end to this year as the Fed moves away from the era of easy money amid strong economic data. And this has become a source of cross-asset volatility. Goldman Sachs rates strategist Avisha Thakkar said: “Market depth and price impact indicators are approaching levels seen during the virus shock, indicating a fairly high risk of price disorder. Without the Fed as a backup buyer, a side effect is that when a shock does materialize, the market Fragile risks are greater.

Analyst Cameron Crise: Fed may be forced to raise rates sharply in September or beyond if inflation doesn't subside over summer

If inflation doesn't subside over the summer, the Fed could be forced to raise rates sharply in September or beyond. This is not reflected in market pricing, so the September FOMC meeting will need to focus on the Fed's reaction and market risk. Of course, it's not shocking that Powell sounds tough. He noted that the FOMC would not hesitate to exceed the neutral rate if needed. Of course, no one really knows where the neutral rate will be in the short run, although the committee believes that in the long run, the nominal neutral rate is around 2.375%-2.5%.

Analyst: If Bullard's yield forecast is accurate, stock market rally won't last

Stocks rallied again on Tuesday, but if St. Louis Fed President Bullard is right, the rally won't last long. Bullard expects upward pressure on yields as central banks shrink their balance sheets. Policymakers need to focus on the impact of "global quantitative tightening" as other central banks are also shrinking their balance sheets. The prospect of Fed tightening has already been reflected in the market;

This means that the balance sheet, not the interest rate outlook, will be the main force driving the market. The 10-year U.S. Treasury yield could rise above 3%, and the dollar could resume its gains. The stock market rally we've seen may just be a pause in a broad market sell-off.

Analyst Divyang Shah: ECB more likely to raise rates by 50bps in September

Today's speech by the hawkish ECB Governing Council member Nott made a 50-basis-point rate hike possible at the July meeting, and bets now point to a 15% chance of a 50-basis-point rate hike by the ECB. We think the ECB is more likely to start with a 25bps rate hike and will consider a larger 50bps hike at its September meeting, and if that happens, a 50bps hike in December The possibility should not be ruled out either.
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