Forex news: ECB warns on EUR weakness; NZD and AUD fall on recession signs
09:10, 16 May 2022
The euro’s recent free-fall halted at the start of the week, after Banque de France governor Francois Villeroy de Galhau cautioned that the European Central Bank (ECB) will closely monitor developments in the effective exchange rate, and that a too-weak euro might jeopardise price stability.
EUR/USD recovered to 1.042 after hitting the 20-year support level at 1.035 on Friday.
However, in the big picture, the euro remains firmly in the dollar’s grip, coming dangerously close to dollar parity as the Ukrainian crisis and concerns about energy supply continue to exert negative pressure on the single currency.
Will the ECB step in?
Despite the euro’s timid rebound, there are no signs of a broad risk-on, as currency markets were hammered by new worries of a global economic slowdown, following the alarming macro data from China, with the Australian (AUD) and New Zealand dollars (NZD) leading losses among major currencies.
Retail sales in China fell 11.1% year-on-year (y/y) in April, the worst drop since March 2020 (-15.9%) and much below the expected decline of 6.1%, as Covid lockdowns considerably reduced spending activity. The Chinese unemployment rate rose to 6.1% in April, outpacing the forecasted 6%.
China’s industrial production also unexpectedly declined by 2.9% (y/y) in April 2022, falling short of the market estimate of 0.4% rise and reversing a 5% gain in March. It was the first drop in industrial output since March 2020.
The Australian dollar (AUD/USD) fell by 0.4% on the day, hitting the 0.69 level versus the dollar. The New Zealand dollar (NZD/USD) echoed the Aussie, by slipping 0.3% today to 0.625.
The Chinese yuan (USD/CNH) further weakened in the European morning, reaching 6.80 per USD.
Early signs of a Chinese economic slowdown were further bolstered by remarks by former Goldman CEO Lloyd Blankfein about the high risks of a US recession.
Aussie (AUD/USD) and Kiwi (NZD/USD) dollars bore the brunt of China’s lockdowns.
Meanwhile, the Turkish lira (TRY) is back under pressure, surpassing 15.50 per USD for the first time since the end of 2021.
Spiralling energy prices pushed Turkey’s inflation rate to a 20-year high of 70% last month, and speculation resumed as the government’s ‘lira-isation’ scheme loses grip in the face of lower central bank reserves and extremely negative real interest rates.
USD/TRY hits fresh year-to-date highs
The British pound continued to see selling pressure against the US dollar (GBP/USD), falling to $1.223, and it is currently exhibiting a decline of 0.4% today against the euro (EUR/GBP).
Worries of a trade war kept GBP sentiment on a weaker foot following the UK government’s proposal that unilateral modifications to the Northern Ireland Protocol could be considered, while trade statistics showed record imports and trailing exports last week.
The pound will be waiting for April inflation data on Wednesday, which is expected to rise to 9.1% year-on-year from 7% in March. Surprising outcomes might rekindle speculation of a more aggressive Bank of England response, giving the GBP a boost.
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GBP/USD is down nearly 10% year-to-date
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