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Dollar soars with U.S. economy on solid ground; sterling slumps

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Dollar soars with U.S. economy on solid ground; sterling slumps
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Investing.com – The U.S. dollar rose sharply in European trade Friday, after the surprise cut by the Swiss National Bank cast the Federal Reserve in a more hawkish light.

At 04:00 ET (09:00 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.4% higher at 104.085, near a three-week high and on track for a second week of gains.

U.S. economy on solid footing

The delivered the biggest surprise of a week filled with central bank meetings, cutting interest rates and citing the strength of the franc as a reason.

The Swiss franc, the best performing G10 currency of 2023, dropped more than 1% overnight, and has continued to fall Friday, with up 0.4% to 0.9009, rising closer to parity.

This move has prompted traders to reassess the Fed’s likely future actions, in the wake of this week’s FOMC meeting where officials reaffirmed the likelihood of three interest rate cuts this year if the economic data allows.

The U.S. central bank also sharply upgraded its outlook for growth in 2024, and Thursday’s data suggested the U.S. economy remained on solid footing after the number of Americans filing for unemployment benefits unexpectedly fell last week, while sales of previously owned increased by the most in a year in February.

This suggests the Fed doesn’t need to be in any hurry to cut rates going forward.

That said, “the jump in the dollar appears overdone,” said analysts at ING, in a note.

“The Federal Reserve sent a rather clear message earlier this week: some resilience in activity data won’t be a barrier to cutting as long as inflation shows downward momentum.”

BOE rate cut expectations not “unreasonable”

In Europe, fell 0.5% to 1.2588, falling to a one-month low after the left interest rates unchanged on Thursday, but two MPC members dropped their calls for a rate hike in the face of easing inflation.

Expectations of interest rate cuts this year were not “unreasonable”, according to Bank of England Governor Andrew Bailey, the Financial Times reported on Friday.

“Markets are largely reading this as an acknowledgement that cuts aren’t too far away,” ING added, and now increasingly convinced the BoE will start easing in June (20bp priced in), along with starting to speculate on a May move (7bp priced in).”

traded 0.4% lower to 1.0814, with eurozone activity data continuing to paint a grim picture for the region’s manufacturing outlook. 

The European Central Bank may be in a position to cut interest rates before the summer recess, possibly in June, as inflation is on its ways back to the bank’s 2% target, Bundesbank President Joachim Nagel said on Friday.

The comments add Nagel to a long list of policymakers seemingly backing a cut in June and suggest the ECB will be the second major central bank after its Swiss counterpart to start unwinding a record string of rate hikes.

Yen close to four-month low

traded marginally lower at 151.59, close to its highest level in four months, with the yen nursing steep overnight losses.

rose 0.2% to 7.2297, crossing the 7.2 level for the first time since November 2023, following reports that the PBOC was selling dollars and buying yuan from the open market to support the Chinese currency. 

dropped 0.8% to 0.6515, with risk sentiment taking a hit. 

 

Forex

BofA projects EUR-USD to hit 1.12 by year-end, above consensus

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Bank of America (BofA) released its currency market forecast, projecting the EUR-USD exchange rate to reach 1.12 by the end of the year. The bank’s analysts expect the majority of the euro’s appreciation to occur in the second half of the year, positioning their forecast above the consensus estimate of 1.08 for 2024.

In addition to the euro, BofA’s analysis remains focused on the G4 currencies. The pair is currently trading around the bank’s year-end forecast for 2024. However, BofA noted that there are still risks of intervention in the currency pair.

The British pound (GBP) is also on BofA’s radar, with the bank maintaining a constructive outlook on the currency. This optimism is fueled by stronger-than-expected UK Consumer Price Index (CPI) data. Nevertheless, BofA acknowledges that the upcoming UK general election will likely dominate short-term market attention.

BofA’s broader view on the currency markets includes a forecast for a gradual depreciation of the US dollar across most of the G10 currencies throughout this year and into the next.

The forecast also suggests a slightly greater depreciation for the US dollar against higher-beta G10 currencies.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

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Forex

UBS shifts stance on Swiss franc, now sees it as neutral

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UBS modified its outlook on the Swiss franc, adjusting the currency’s status from “least preferred” to “neutral.” This reassessment comes amid expectations that the U.S. dollar will maintain its strength, with potential for intermittent increases in value.

However, UBS does not anticipate a sharp rally or significant depreciation of the dollar when the Federal Reserve begins its rate-cutting cycle, which is expected to start in September.

UBS’s forecast suggests that geopolitical uncertainties, particularly those related to the Middle East, are likely to persist. The firm notes that unless there is a surge in oil prices due to actual disruptions in supply, these geopolitical factors should not lead to a substantial increase in market risk aversion.

The firm continues to encourage investment in currency crosses, which involve trading between two currencies, excluding the U.S. dollar. UBS’s adjustment to the Swiss franc’s status indicates a change in the perceived risk and potential return of holding or trading the currency.

The reassessment of the Swiss franc by UBS reflects a broader analysis of the currency’s position in the market. Previously considered as a less favorable option, the Swiss franc’s new “neutral” rating suggests that the risks associated with short positions in the currency may have diminished.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

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Dollar steadies after sharp gains post Fed minutes; sterling retains strength

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Investing.com – The U.S. dollar handed back some of the previous session’s gains Thursday, but remained near a one-week high after the release of hawkish minutes from the last Federal Reserve meeting suggested U.S. interest rates would remain elevated for some time. 

At 04:20 ET (08:20 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% lower at 104.705, after gaining 0.3% overnight.

Dollar boosted by hawkish Fed minutes

The of the Fed’s late-April meeting showed policymakers were growing increasingly concerned over sticky inflation, with some Fed officials talking about potentially raising rates further to bring down inflation.

“While the general view was that policy was ‘well positioned’, many members were open to more hikes if needed. Incidentally, ‘many’ participants questioned whether policy was restrictive enough,” said ING in a note.

Several Fed officials have subsequently cautioned about inflation levels in speeches following the gathering.

But the Fed is still seen as unlikely to raise interest rates further, and so markets are now pricing in a greater chance the central bank will keep rates high for longer. 

Atlanta Fed Chair is set to speak later in the session, and traders will look to his comments as well as data for May for further clues.

Sterling retains firm tone after election news

In Europe, rose 0.1% to 1.2730, with sterling retaining its firm tone after Wednesday’s data showed that U.K. inflation fell by less than expected in April.

Prime Minister Rishi Sunak called a national election, which his Conservative party is widely expected to lose to the opposition Labour Party after 14 years in power.

“The pound also seems to have been only very lightly impacted by the news,” said ING, as “crucially, many of the volatility-inducing events that had been associated with UK politics in previous years (UK-EU trade relationships, unfunded budget spending, the Scottish referendum) all seem to be rather marginal risks now.”

traded 0.2% higher to 1.0839, after data showed that eurozone business activity has expanded at its fastest pace in a year this month.

HCOB’s preliminary climbed to 52.3 this month from April’s 51.7, beating expectations for a more modest lift to 52.0, supported by buoyant demand for services, while the manufacturing sector showed signs of approaching a recovery.

The European Central Bank has largely confirmed it will start its rate-cutting cycle next month, and the current debate is how many more cuts, if any, the policymakers will agree to this year.

Yen flat despite PMI improvement

In Asia, largely flat at 156.76, after surging close to 157 in overnight trade, with data for Japan showing manufacturing activity expanded for the first time in 11 months. 

traded 0.1% higher at 7.2443, trading just below a six-month high.

Beijing was seen banning certain U.S. firms from participating in trade activity relating to China, while also banning some arms shipments to Taiwan. The move was seen as retaliation for steeper U.S. tariffs on key Chinese industries, which will go live from August 1.

China also carried out military drills near Taiwanese territory, ramping up concerns over heightened tensions in the area.

 

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