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Market News Forex Trading Alert: Dollar set for first monthly drop in five, ECB under more pressure
Forex Trading Alert: Dollar set for first monthly drop in five, ECB under more pressure
In early Asian trading on May 31, the U.S. dollar index was at 101.41. The dollar resumed its decline on Monday, as risk appetite in various markets was supported by encouraging economic data and bets that the Federal Reserve will slow down policy tightening. A brief boost.
2022-05-31
10791
In early Asian trading on Tuesday (May 31), the U.S. dollar index was at 101.41. The dollar resumed its decline on Monday, as various markets supported by encouraging economic data and bets that the Federal Reserve will slow down policy tightening. risk appetite increased briefly.
The U.S. dollar index, which tracks the greenback against six major rivals, was on track for its first monthly decline in five months, as the safe-haven greenback lost momentum after a strong start to the year.
Trading was thin on Monday as U.S. stocks and bonds were closed for the Memorial Day public holiday. U.S. consumer spending rose more-than-expected in April, households increased purchases of goods and services, and inflation slowed, data released on Friday showed. Encouraging economic data, coupled with bets that the Federal Reserve will tighten policy more cautiously, is weakening the dollar, analysts said.
Global stocks rose on Monday, as Asian powerhouses eased coronavirus restrictions and unleashed fresh stimulus to help sustain last week's rally. "How the U.S. consumer performs going forward, and how the Asian economy performs from a global perspective, will be key determinants of investors' overall risk appetite," said foreign exchange analysts at MUFG in a note. There will also be a slew of economic data, including U.S. jobs data, that could provide clues on the outlook for global growth.
German and Spanish inflation data on Monday showed price gains accelerated in May, driven by soaring energy prices, with German Finance Minister Christian Lindner saying earlier on Monday that containing price spikes was a "top priority" while advocating an end to expansionary fiscal policy , "Inflation is a huge economic risk, we must fight inflation to avoid an economic crisis and avoid self-reinforcing and spiraling inflation." Inflation data suppressed the euro's gains, which rose 0.42%. Just ten days from now, the European Central Bank is due to hold a major meeting, where it is expected to announce an end to large-scale asset purchases and confirm plans to raise interest rates in July for the first time in more than a decade. Euro zone inflation data will be released on Tuesday.
JPMorgan strategist: The strength of the Fed's "hawk" sound and the dollar may peak
JPMorgan strategists said improving trade-offs over economic policy, coupled with inflation and a peaking dollar, should help risk assets such as equities perform in the second half of the year. Confidence about the economic cycle has been very subdued, and the peak of Fed hawkishness may have passed, strategists including Mislav Matejka wrote in a note.
Relative to growth stocks, maintain an overweight rating on value stocks, "but we no longer expect growth stocks to be part of the decline in absolute terms." Among developed markets, the UK remains one of the best risk-reward countries.
Bank of America: recommends hedging over sterling crisis
Bank of America strategists said investors should hedge against a sterling crisis, given the challenges sterling typically faces in emerging markets.
Strategist Kamal Sharma said in a report that continued rate hikes by the Bank of England will not be enough to save the pound. The country's current account deficit, deteriorating relations with the European Union over Northern Ireland and doubts about the central bank's credibility could combine to create a "perfect storm".
"While not wanting to overstate the pound's woes into some kind of 'doomsday' scenario, we are concerned that the growing politicisation of UK policy is weakening the pound, as is happening in emerging markets, and we feel Something is changing in the UK, with the Bank of England becoming less readable and less transparent; the Bank neither discusses nor acknowledges that Brexit has been a major headwind on the supply side, and it feels the Bank of England is losing its control of the target."
This is not the first time in recent years that Wall Street analysts have compared the pound to emerging markets. The contrast has also emerged during Britain's bumpy Brexit process, when political news hit the pound. Bank of America strategists have also likened the performance of the pound to emerging market currencies in the past.
Sharma advises clients to hedge against "current account crisis" risks, "The UK current account deficit is not a new phenomenon. But the liquidity and trading environment for the pound has changed and is facing the most challenging macro in nearly a generation. Economic/policy one," he said, "even though the pound is one of the most actively traded currencies in the world, it's been impressive how often the pound has been subject to a liquidity black hole since 2016."
Citi economist Benjamin Nabarro: UK expected to provide additional stimulus this financial year
The UK government is expected to provide more financial support to UK households by the end of the current financial year (to April next year). The package unveiled last week set a precedent for the government to provide support to vulnerable households, and as household incomes continue to tighten, a package of between £5bn and £10bn is likely to be introduced. The UK government is expected to cut VAT in the fourth quarter and make permanent tax cuts from April 2023 to stimulate the economy, if persistent risks to inflation subside.
DWS: German inflation data increases pressure on ECB
Ulrike Kastens, an economist at DWS, said Germany's preliminary May inflation data added to the pressure on the European Central Bank, which looks set to raise interest rates in July and September. Although the ECB still intends to gradually normalize monetary policy, if the inflation target is not met for a long time, the ECB may need to adopt more tightening policy in the medium term. In addition to energy, it was mainly food prices that pushed up inflation in Germany in May. While there were signs of a slight pullback in energy prices in June, this was only a short-lived pullback that was far from making up for the loss in real income.
The U.S. dollar index, which tracks the greenback against six major rivals, was on track for its first monthly decline in five months, as the safe-haven greenback lost momentum after a strong start to the year.
Trading was thin on Monday as U.S. stocks and bonds were closed for the Memorial Day public holiday. U.S. consumer spending rose more-than-expected in April, households increased purchases of goods and services, and inflation slowed, data released on Friday showed. Encouraging economic data, coupled with bets that the Federal Reserve will tighten policy more cautiously, is weakening the dollar, analysts said.
Global stocks rose on Monday, as Asian powerhouses eased coronavirus restrictions and unleashed fresh stimulus to help sustain last week's rally. "How the U.S. consumer performs going forward, and how the Asian economy performs from a global perspective, will be key determinants of investors' overall risk appetite," said foreign exchange analysts at MUFG in a note. There will also be a slew of economic data, including U.S. jobs data, that could provide clues on the outlook for global growth.
German and Spanish inflation data on Monday showed price gains accelerated in May, driven by soaring energy prices, with German Finance Minister Christian Lindner saying earlier on Monday that containing price spikes was a "top priority" while advocating an end to expansionary fiscal policy , "Inflation is a huge economic risk, we must fight inflation to avoid an economic crisis and avoid self-reinforcing and spiraling inflation." Inflation data suppressed the euro's gains, which rose 0.42%. Just ten days from now, the European Central Bank is due to hold a major meeting, where it is expected to announce an end to large-scale asset purchases and confirm plans to raise interest rates in July for the first time in more than a decade. Euro zone inflation data will be released on Tuesday.
Preview Tuesday
Institutional point of view:
JPMorgan strategist: The strength of the Fed's "hawk" sound and the dollar may peak
JPMorgan strategists said improving trade-offs over economic policy, coupled with inflation and a peaking dollar, should help risk assets such as equities perform in the second half of the year. Confidence about the economic cycle has been very subdued, and the peak of Fed hawkishness may have passed, strategists including Mislav Matejka wrote in a note.
Relative to growth stocks, maintain an overweight rating on value stocks, "but we no longer expect growth stocks to be part of the decline in absolute terms." Among developed markets, the UK remains one of the best risk-reward countries.
Bank of America: recommends hedging over sterling crisis
Bank of America strategists said investors should hedge against a sterling crisis, given the challenges sterling typically faces in emerging markets.
Strategist Kamal Sharma said in a report that continued rate hikes by the Bank of England will not be enough to save the pound. The country's current account deficit, deteriorating relations with the European Union over Northern Ireland and doubts about the central bank's credibility could combine to create a "perfect storm".
"While not wanting to overstate the pound's woes into some kind of 'doomsday' scenario, we are concerned that the growing politicisation of UK policy is weakening the pound, as is happening in emerging markets, and we feel Something is changing in the UK, with the Bank of England becoming less readable and less transparent; the Bank neither discusses nor acknowledges that Brexit has been a major headwind on the supply side, and it feels the Bank of England is losing its control of the target."
This is not the first time in recent years that Wall Street analysts have compared the pound to emerging markets. The contrast has also emerged during Britain's bumpy Brexit process, when political news hit the pound. Bank of America strategists have also likened the performance of the pound to emerging market currencies in the past.
Sharma advises clients to hedge against "current account crisis" risks, "The UK current account deficit is not a new phenomenon. But the liquidity and trading environment for the pound has changed and is facing the most challenging macro in nearly a generation. Economic/policy one," he said, "even though the pound is one of the most actively traded currencies in the world, it's been impressive how often the pound has been subject to a liquidity black hole since 2016."
Citi economist Benjamin Nabarro: UK expected to provide additional stimulus this financial year
The UK government is expected to provide more financial support to UK households by the end of the current financial year (to April next year). The package unveiled last week set a precedent for the government to provide support to vulnerable households, and as household incomes continue to tighten, a package of between £5bn and £10bn is likely to be introduced. The UK government is expected to cut VAT in the fourth quarter and make permanent tax cuts from April 2023 to stimulate the economy, if persistent risks to inflation subside.
DWS: German inflation data increases pressure on ECB
Ulrike Kastens, an economist at DWS, said Germany's preliminary May inflation data added to the pressure on the European Central Bank, which looks set to raise interest rates in July and September. Although the ECB still intends to gradually normalize monetary policy, if the inflation target is not met for a long time, the ECB may need to adopt more tightening policy in the medium term. In addition to energy, it was mainly food prices that pushed up inflation in Germany in May. While there were signs of a slight pullback in energy prices in June, this was only a short-lived pullback that was far from making up for the loss in real income.
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