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Powell’s speech: we may already be at a fairly restrictive level, not far from it

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Powell's speech

FOMC Chairman Jerome Powell commented on the policy outlook after the Fed decided to raise the policy rate by 25 basis points to a 5-5.25% range at the end of the May meeting. Traders and investors are reminded that every word Powell says at the moment has a big impact on the S&P 500 and the stock market. 

Key Quotes

“We’re trying to reach a sufficiently restrictive level and then stay there for an extended period of time to reduce inflation.”

“We have to balance the risk of not doing enough with the risk of slowing economic activity too much.”

“We believe that raising the rate and changing the text of the statement is the right way to balance that.”

“It will be an ongoing process of evaluating the appropriate rate level.”

“The policy is tight.”

“The real rates are about 2%, which is well above the neutral rate.”

“We may be at a fairly restrictive level, maybe not very far from it.”

“We have a goal of getting to 2%, it’s going to take some time and it’s not going to be a smooth process.”

“Wages are still above the 2% inflation target.”

“The labor market is very, very strong and inflation is high and well above the target.”

“Right now we need to focus on lowering inflation.”

Earlier, we reported that the dollar has no real competitor.


Euro Seen as Undervalued Versus Sterling, Has Limited Scope to Fall

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The euro looks undervalued against sterling and has limited scope to extend its recent fall, ING says. “EUR/GBP has moved back below 0.8600 after a very small rebound and we estimate the pair to be trading at around a 2.0% short-term undervaluation at the current levels, which falls beyond the 1.4% 1.5 standard-deviation lower-bound,” ING analyst Francesco Pesole says in a note. 

EUR/GBP will increasingly struggle to fall given its undervaluation and as markets are already pricing in 100 basis points of interest-rate rises by the Bank of England, he says. EUR/GBP trades flat at 0.8585 after earlier hitting a one-week low of 0.8576, according to FactSet. 

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Dollar rebound from sharp losses; Fed meeting in focus

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The U.S. dollar edged higher in early European trade Friday, rebounding after the previous session’s sharp losses as traders sought out a safe haven after weak Chinese inflation data.

At 02:55 ET (06:55 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher at 103.358, having lost more than 0.7% in the previous session, its largest daily decline in weeks.

Safe haven dollar receives boost from Chinese data

The dollar was in demand early Friday after data showed that Chinese consumer inflation shrank in May from the prior month, while producer inflation fell at its sharpest pace in seven years.

This followed a string of weak economic readings from China in the past two weeks, which suggested that the second largest economy in the world, and a major regional growth driver, was struggling to rebound from its COVID hit.

This could push the Chinese government to roll out more supportive measures in the coming months, but this would likely weaken the yuan further, to the benefit of the dollar.

USD/CNY rose 0.1% to 7.1215, with the yuan hovering around six-month lows.

Dollar still on course for worst week since March

However, this bounce in the U.S. currency came after hefty losses in the previous session after weak employment data pointed to a pause in the Federal Reserve’s year-long rate-hiking cycle.

The greenback is down 0.6% for the week, set for its worst week since mid-March.

Data released on Thursday showed that the number of Americans filing new claims for unemployment benefits surged to the highest in more than 1½ years last week.

With signs of the labor market weakening, Tuesday’s release of the latest consumer prices index, for May, looms large as it comes out just before the central bank officials get together to make their decision on interest rates.

ECB’s de Guindos set to speak

EUR/USD fell 0.1% to 1.0777, with ECB Vice President Luis de Guindos due to speak at an event in Madrid later in the session.

Traders will be seeking guidance ahead of the European Central Bank’s policy-setting meeting next week, although the central bank is widely expected to hike once more.

Italian industrial production data for April is also due later in the session and is expected to climb just 0.1% on the month, an annual fall of 4.1%.

Elsewhere, GBP/USD edged higher to 1.2562, near a one-month high, AUD/USD traded flat at 0.6717, while USD/JPY rose 0.4% to 139.41.

USD/TRY rose 1.7% to 23.4950, with the lira falling to another record low against the greenback after President Tayyip Erdoğan appointed Hafize Gaye Erkan, a finance executive in the United States, to head Turkey’s central bank.

These moves suggest a turn towards orthodoxy in Turkish monetary policy, which could see the country’s economy hit with higher interest rates.

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Dollar remains near two-month high on hawkish Fed expectations

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The U.S. dollar edged lower in early European trade Thursday, but remained near its recent two-month high with traders anticipating next week’s U.S. Federal Reserve’s policy-setting meeting.

At 03:15 ET (07:15 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% lower at 104.002, just below the 2-month peak of 104.70 seen last week.

One more hike by the Fed?

The U.S. central bank is widely expected to pause its year-long interest rate hiking cycle next week, and expectations are growing that this could be a temporary position and another rate increase is still a distinct possibility this year, possibly in July.

These increased expectations that U.S. interest rates may have further to rise have come on the back of surprise rate increases by the Bank of Canada and the Reserve Bank of Australia this week, with both central banks bemoaning the sticky nature of their inflation.

The Fed will see the latest consumer prices before they make their decision on interest rates, and any upwards move from May’s 4.9% annual figure would likely cement another hike.

“The U.S. economy continues to surprise to the upside, while Europe and China have been weaker than expected…this pattern will have to abate before medium-term shallow dollar depreciation can come back into view,” said Goldman Sachs, in a note.

ECB officials still hawkish

EUR/USD rose 0.1% to 1.0711, with officials at the European Central Bank continuing to paint a hawkish picture over future interest rates as they attempt to tame inflation steel at elevated levels.

Dutch central bank chief Klaas Knot was the latest to point to more tightening, saying on Wednesday that he’s “not yet convinced that the current tightening is sufficient,” adding “inflation could well remain too high for a long time and further rate hikes will then be necessary.”

However, economic data of late has pointed to a region still struggling to recover from the difficulties caused by last year’s soaring energy prices.

The latest iteration of eurozone GDP is expected to show that the region stagnated in the first three months of this year, growing just 1.2% on an annual basis.

Unemployment data could weigh on sterling

GBP/USD rose 0.1% to 1.2452, trading in a tight range with traders awaiting next week’s release of jobs and wages data. 

“We see that as a negative event risk for sterling, where wage growth could continue to slow and take some of the steam out of the 100bp+ Bank of England tightening expectations still priced in by money markets,” said ING, in a note.

AUD/USD rose 0.3% to 0.6667, with the Aussie dollar still benefiting from this week’s surprise RBA hike and USD/JPY fell 0.2% to 139.88, taking some support from an upward revision to the country’s first quarter gross domestic product reading.

USD/CNY rose 0.1% to 7.1333, with the yuan hitting a fresh six-month low against the dollar on growing expectations of an interest rate cut by the People’s Bank of China this month.

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