Forex trading alert: Lagarde's rate hike hints boost euro, RBNZ or 50bps hike

On Wednesday (May 25), the U.S. dollar index was at 101.76 at the beginning of the Asian market. On Tuesday, it hit its lowest level in nearly a month at 101.6428. Data showed that business activities in the United States slowed down in May, and rising prices cooled demand for services. A fresh round of supply constraints stemming from the Ukraine war has hampered factory production, and S&P Global said preliminary readings of its U.S. Composite Purchasing Managers' Index (PMI) output measure, which tracks manufacturing and services, showed a four-month pace of growth. Slowest to come; markets await the minutes of the evening Fed policy meeting.



The euro was boosted after European Central Bank President Christine Lagarde said euro zone interest rates could reach positive territory by the end of the third quarter. Lagarde's remarks suggested the ECB's deposit rate would be raised by at least 50 basis points and sparked speculation that the central bank will raise rates further this summer. The rate hikes are aimed at countering rising energy prices from the war in Ukraine and a surge in inflation fueled by massive public sector stimulus in the wake of the Covid-19 pandemic.

The euro was up 0.4% at $1.0747. The euro has rallied 3.7% over the past seven sessions, John Doyle, vice president of trading and trading at Monex USA, said of the ECB: “Compared to the Fed, they’re a bit late. But if you look at By the time they try to catch up with the tightening cycle, then the gap between the Fed and the ECB, which benefits the dollar, tightens a bit, which is why you see the euro recovering from multi-year lows.”

Marshall Gittler, head of investment research at BDSwiss, said that in the U.S., most expectations of the Fed's foreseeable tightening of monetary policy may have already been priced in. This expected divergence could drive EUR/USD further higher in the coming sessions as markets have only recently started to revalue the divergence. "

Sterling dipped 0.39% against the dollar after a business survey showed Britain's economic momentum slowed much more than expected this month, adding to recession fears at a time when inflationary pressures are rising. The New Zealand dollar fell 0.09% against the US dollar. New Zealand will announce its policy decision today, and the market is widely expected to raise the benchmark interest rate by 50 basis points from the New Zealand Federal Reserve.

The agency expects the Reserve Bank of New Zealand to raise the official cash rate (OCR) by 50 basis points to 2.00%, a rate hike that has been fully priced in by overnight index swaps in the market. The Reserve Bank of New Zealand has raised interest rates four times in a row, and last month it exceeded market expectations by raising interest rates by 50 basis points. The decision needs to focus on the rhetoric of the RBNZ on the future OCR and whether it will maintain an aggressive pace of 50 basis points of rate hikes in the rate hike cycle, which will boost the kiwi. If the Reserve Bank of New Zealand reveals that it is slowing the pace of tightening policy, it will put pressure on the New Zealand dollar.

ASB Bank of New Zealand expects the Reserve Bank of New Zealand to raise interest rates by 50 basis points, raising the official cash rate (OCR) to 2%. The market has almost fully priced in the 50 basis point rate hike expectations, but there is wide divergence on the future rate path and forward guidance. The Reserve Bank of New Zealand is expected to acknowledge that the economy faces recession risks and that inflation remains the top priority. The July resolution is expected to take a more cautious, more data-dependent approach, with the pace of rate hikes returning to the usual 25 basis points.

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Institutional view

Morgan Stanley: Month-end positioning rebalancing pattern favors dollar rally

Morgan Stanley FX analysts John Kalamaras, James Lord and Matthew Hornbach use a model that measures the absolute performance of the stock market to generate month-end exchange rate signals. Most local stocks were weaker in May, suggesting the dollar should strengthen in the final week. The model expects USD to outperform in May 2022: Our signals suggest USD should strengthen against most G10 currencies by the end of the month, with the exception of GBP, JPY and NOK. The dollar's correlation with U.S. equities has been negative recently, so rebalancing flows into U.S. equities could unexpectedly cause the dollar to fall. Favorable month-end positioning rebalancing flows could help the dollar rise in the last week of May.

Bank of America Merrill Lynch: U.S. economy faces recession or stagflation risk, recommends selling 10-year TIPS and holding 30-year TIPS

Fed rate hikes run the risk of tipping the economy into recession or stagflation, so I recommend selling 10-year inflation-protected bonds (TIPS) and holding longer-dated TIPS. There are growing concerns about a period of weak growth and high inflation in the U.S. economy, which is expected to lead to higher breakeven inflation and lower real interest rates, especially long-term rates. As the growth rate slows and the unemployment rate rises, the Fed can stop tightening policy. It is expected that the Fed will stop tightening policy in May 2023. The core personal consumption expenditure price index in the second quarter is expected to record 3.4%. Growth will slow to 0.4% by the end of next year.

Bank of America: Consumers are tough on inflation

Bank of America chief executive Brian Moynihan said U.S. consumers were resilient to inflation, spending more and paying off their credit cards. In an interview with Bloomberg Television on the sidelines of the World Economic Forum in Davos, Switzerland, on Tuesday, Moynihan said consumers’ account balances were “several times” higher than they were before the pandemic.

In the first two weeks of May, consumer spending rose 10 percent from last year, more than the inflation effect, Moynihan said. He said consumer spending is not expected to slow anytime soon. In remarks earlier in the day, Moynihan addressed the debate around ESG ratings and regulation, suggesting that anger from the likes of Elon Musk over the scoring methodology is not entirely unfounded.
Previously, the Charlotte, N.C.-based bank said it would raise the minimum wage to $22 an hour this week, another step toward its goal of hitting $25 by 2025 as the labor market tightens. As a result, employers have increased pay and benefits.

Strategist: Expect BOJ to be forced to act on yield curve control soon

Brad Bechtel, strategist at Jefferies: There has been a clear shift in client sentiment towards USD/JPY, with many now expecting the Bank of Japan to soon be forced to act on yield curve control, which will prevent further gains in the pair. The mindset of many investors who had expected the exchange rate to rise to 140 or 150 has changed.