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Forex news: Does the fire truck have to put the brake on the US dollar?

10:13, 25 May 2022

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  • AUD/USD

    0.67930 USD
    -0.01206 -1.750%
  • USD/CAD

    1.29347 USD
    0.00837 +0.650%
  • USD/JPY

    134.945 USD
    -0.726 -0.540%

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High Angle View Of Traffic Downtown – Fire trucks at cross road
The Fed’s anti-inflation ‘fire truck’ could itself harm the economy, said Atlanta Fed president Raphael Bostic – Photo: Getty Images

The US dollar index (DXY) rebounded to 102.4 levels in European morning trade today, up by 0.5% on the day after falling over 3% from the high of 105 it hit two weeks ago, as traders cautiously awaited today’s release of the minutes of the Federal Open Market Committee (FOMC)’s early May meeting.

The USD rose against all major currencies, with notable gains versus the euro (+0.6%) and the Australian dollar (+0.5%), while the New Zealand dollar cushioned losses owing to the Reserve Bank of New Zealand’s interest rate hike.

However, this dollar rebound may be not sustainable in the medium term. 

To adopt the analogy used by Atlanta Fed president Raphael Bostic yesterday, the fire truck (the Federal Reserve) which is attempting to put out the fire (inflation) needs to slow down at crossroads, in order to avoid doing more damage (causing a recession).

US dollar (DXY): Fed hikes are priced in; bad news still to come?

The narrative that is slowly gaining traction in the market is this: the Federal Reserve may be forced – not now, but in the coming quarters – to scale down its aggressive interest rate rises, in order to prevent pushing the economy into recession.

US macro data is starting to surprise market expectations on the downside.

New home sales in the United States fell 16.6% in April 2022, to a seasonally adjusted annual pace of 591,000 units, the lowest level since April 2020 and much below expectations of 750,000.

The S&P Global Services PMI, a gauge of private sector optimism, dropped to 53.5 in May 2022 from 55.6 the previous month, the lowest level in four months and below market expectations of 55.2.

Today’s Federal Reserve minutes will demonstrate the board’s cohesion in its goal of combating inflation through regular and decisive rate rises. However, if market investors’ fears of a recession grow, the dollar may continue to fall.

Chart of the day: US home sales and service-sector optimism plummeted in April

Chart showing US new home sales and services PMIUS new home sales and ISM services PMI slowing – Photo: Capital.com / Source: Tradingviewdown

RBNZ’s rate hikes halt Kiwi’s decline

The Reserve Bank of New Zealand (RBNZ) hiked its official cash rate (OCR) by 50 basis points to 2% today, in line with market expectations. It is the fifth consecutive rate hike by RNBZ, but the board emphasised the need to push the OCR to a higher level than previously anticipated due to rising prices, noting that a greater and earlier increase decreases the danger of persistent inflation.

The New Zealand dollar (NZD) jumped to $0.651 on the announcement, its highest level since 5 May, before retreating to 0.645 amid a broad US dollar gain.

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The Kiwi (NZD) has been the weakest G-10 currency in the last month, due to its significant correlation to risk appetite sentiment and global stock markets (US 500 – S&P 500). Nevertheless, a more hawkish Reserve Bank of New Zealand (RBNZ) that raises interest rates might provide support for the New Zealand currency.

NZD has mirrored S&P 500’s fall: Will RBNZ rate hikes change the course?

Correlation between NZD and global equity markets S&P 500NZD/USD and the S&P 500 moved hand-in-hand – Photo: Capital.com / Source: Tradingview

GBP’s party ended

Bears reappeared on the cable (GBP/USD) after a 4% rebound from oversold levels hit on 12 May, with the pound dipping to the $1.25 zone this morning.

Yesterday, the preliminary result of the UK Services PMI for May plummeted to 51.8 from 58.9, against an expectation of 57. It’s the lowest level of confidence in the private sector since May 2020.

Meanwhile, concerns associated with Brexit and the Northern Ireland protocol are once again in the spotlight. 

The EU ambassador to the UK has turned down British foreign secretary Liz Truss’s request to rewrite the Northern Ireland (NI) Protocol, threatening retaliation if the UK government introduces legislation repealing the NI Protocol’s effects.

GBP/USD: Is the rally over? 

Major currencies: Top risers and fallers today – 25 May 2022

    A forex table that compares nine major currencies against each other, including USD, EUR, GBY, JPY, CHF, AUD, NZD, CAD and NOKMajor currencies: Today’s top risers and fallers, 25 May 2022, 11:30 UTC – Photo: Capital.com

    Forex market heatmap – 25 May 2022

    A forex table showing the performance of US dollar and the euro against other currenciesForex market heatmap 24 May 2022, 11:30 UTC – Photo: Capital.com

    Forex markets today – 25 May 2022

    • The US Dollar Index (DXY) rose by 0.5% to 102.3 by 11:30 UTC.  
    • The euro (EUR) slipped to $1.067, down 0.6% on the day after rising 0.4% yesterday. The British pound (GBP) eased to $1.25, down 0.3% today.     
    • Among safe-haven and low-yielding currencies, both the Japanese yen (JPY) and Swiss franc (CHF) fell 0.3%, after posting strong gains yesterday. 
    • Oil-linked currencies continued to fall amid the broader dollar’s strength. The Norwegian krone (NOK) and the Canadian dollar (CAD) fell 0.5% and 0.4% respectively versus the USD.  
    • High-beta majors also suffered losses. The Australian dollar (AUD) slipped 0.4%, while the New Zealand dollar (NZD) was just 0.1% lower thanks to RBNZ’s rate hike. The Swedish krona (SEK) edged 0.5% down versus the EUR. 
    • In emerging markets, the Turkish lira (TRY)’s free fall continues, with the USD/TRY pair topping 16.3 and setting new year-to-date highs.

     

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