DXY appreciated a second week by 0.5% to 103.2 last Friday, alongside a 28 bps rise in the US Treasury 2Y yield to 4.27%. DXY and the 2Y yield bottomed at 101 and 3.65%, respectively, on 4 May, a day after the Fed lifted the Fed Funds Rate (FFR) by 25 bps to 5-5.25%. DXY is near support at 102.9, or its 100-day moving average. To extend its upside, DXY needs to close above 103.5, the level it ended last year.
Over the past fortnight, many Fed officials did not close the door on more hikes to return inflation to its 2% target. The Fed could always lift this year’s FFR target in its June Summary of Economic Projections if inflation’s slowdown starts to become bumpy in a labor market that is not cool enough. On Friday, Bloomberg consensus expects the US PCE deflator to firm to 0.3% MoM (4.3% YoY) in April from 0.1% MoM (4.2%) in March and sees the PCE core deflator unchanged at 0.3% MoM and 4.6% YoY.
However, Fed Chair Jerome Powell kept the door open for a pause at the FOMC meeting on 14 June. US Treasury Secretary Janet Yellen reiterated that the US government could stop paying its bills as early as 1 June (next Thursday) if Congress failed to raise the debt ceiling. Yellen doubted the Treasury could stretch the X-date to 15 June when more tax payments are due. US President Joe Biden will resume negotiations with House Speaker Kevin McCarthy on Monday. However, markets do not expect a compromise to break the deadlock and are bracing for more volatility.
EUR/USD retreated to 1.0805 last week, around the mid-point of this year’s trading range between 1.0484 and 1.1095. EUR’s latest slide started on 4 May, the day the European Central Bank downsized hikes to 25 bps, the same as the Fed a day earlier. After raising the main refi rate from 0% to 3.75% since July, some ECB officials see the central bank 1-2 hikes from a pause. Like the Fed, the ECB wants to keep rates at restrictive levels for some time to get inflation back to its 2% target. EUR did not break above 1.11 in the past month because the Fed’s and ECB’s policy paths may not be as divergent as markets believe.
GBP/USD could push below 1.24 or its 50-day MA. Following the Bank of England’s 25 bps hike to 4.50% on 11 May, GBP retreated from the year’s peak of 1.2680 to 1.2445 last Friday. On 24 May, consensus expects UK CPI inflation to decline to a 13-month low of 8.2% YoY in April after seven months of double-digit readings. If so, this is consistent with the BOE’s expectation for inflation to fall sharply from April on base effects.
USD/CNY may consolidate after rallying more than 3% in the past month. Last Friday, USD/CNY hit a high of 7.06 before retreating to 7.01. China’s regulators issued a statement, warning that the People’s Bank of China and the State Administration of Foreign Exchange would curb speculation in the FX market when necessary, targeting pro-cyclical and one-way bets. At the end of the G7 Summit on Sunday, US President Joe Biden raised expectations for US-China tensions to ease. Last week, US National Security Adviser Jake Sullivan met China’s top diplomat Wang Yi. This week, US Commerce Secretary Gina Raimondo and US Trade Representative Katherine Tai will meet China’s Commerce Minister Wang Wentao. In June, US Defense Secretary Lloyd Austin is seeking to meet with Chinese Defense Minister Li Shangfu.
Quote of the day
“The risks of doing too much versus doing too little are becoming more balanced.”
Fed Chair Jerome Powell on 19 May 2023
22 May in history
In 2014, General Prayut Chan-o-cha became the interim leader of Thailand in a military coup d’état.
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