Foreign exchange trading reminder: Signs of a slowdown in the U.S. economy weigh on the dollar, and the European Central Bank's interest rate hike expectations help the euro strengthen

The dollar index fluctuated in a narrow range in early Asian trading on April 27, Beijing time, and is currently trading around 101.45. The dollar retreated on Wednesday on new signs of a slowdown in the U.S. economy, after data showed that core durable goods orders fell more than expected in March, while the economic outlook in Europe may unexpectedly rise, strengthening the euro. The Swedish krona fell sharply after Sweden's central bank struck a less hawkish tone than expected, while the euro rebounded 0.6 percent from Tuesday's decline, when worries about the U.S. banking sector boosted the safe-haven dollar.

The dollar index closed down 0.42 percent at 101.45 on Wednesday as the Commerce Department said new orders for major durable goods made in the United States fell more than expected last month. Outstanding orders continued to decline steadily, suggesting fewer factors are driving economic activity and that business spending on equipment could weigh on growth in Quarter 1.

Thierry Wizman, global FX and interest rate strategist at Macquarie in New York, said what is driving the dollar up against major currencies are early signs of a slowdown in the U.S. economy and a slowdown in inflation that will be greater than in other economies.

"Whatever slowdown we see in the US is going to come sooner and be more drastic, at least in its early stages, than we see anywhere else in the world," said Mr. Wizman. "The slowdown in inflation we see or will see in the US in the prices of final goods and services will be more drastic and more pronounced than anything we see in the rest of the world."

Manufacturing, which accounts for 11.3 per cent of the US economy, is suffering from the Federal Reserve's fastest rate rise in 40 years. Markets expect Fed policymakers to raise rates by 25 basis points at the end of their two-day meeting on May 3, before possibly pausing. But markets expect the European Central Bank to raise rates further, a distinction that drives the currency.

The euro rose as high as 1.1095 against the dollar on Wednesday, closing up 0.62% at 1.1038. Recently, several European Central Bank officials have hinted that they will continue to raise interest rates to help boost the euro.

The European Central Bank will hold a monetary policy meeting on May 4. Analysis pointed out that the current level of inflation in the euro area is still well above the target set by the European Central Bank, and although there are still differences within the European Central Bank on whether to continue to raise interest rates, the monetary policy meeting is expected to continue to raise interest rates.

Philippe Lane, chief economist of the European Central Bank, said on the 19th that if the situation is still as expected, it will be appropriate for the European Central Bank to continue to raise interest rates to curb inflation. Isabel Schnabel, an ECB official, said on the 24th that raising interest rates by 50 basis points is not out of the question, which will depend on economic data, especially inflation data released a few days before the 4th meeting.

Meanwhile, the German government has raised its forecast for economic growth this year to 0.4 percent from a previous forecast of 0.2 percent, according to the spring economic forecast released on Wednesday.

The European Central Bank's deputy president, Jean-Claude Guindos, said on the 26th that the euro zone economy looks set to avoid the two consecutive quarters of contraction predicted at the end of last year.

The data showed that the preliminary composite PMI for the euro zone in April was 54.4, up from 53.7 in March, slightly higher than expected and above the 50 level of prosperity and decline. The service sector performed particularly well and the manufacturing sector weakened.

The report quoted Giovanni Zanni, chief eurozone economist at NatWestMarkets, as saying the PMI data "may boost the confidence of austerians looking for a 50 basis point rate hike".

"Europe is surprising a lot of people," said Ed Moya, senior market analyst at OANDA in New York. "There are still a lot of risks to their economy and outlook. But this market is still alarmed by the information we are getting from Europe."

The Riksbank raised its policy rate by 0.5 percentage points to 3.50 per cent, in line with market expectations, and said it expected further increases at its June or September meeting, but two vice-presidents voted in favour of a smaller increase. The dollar fell as low as 0.8851 against the Swiss franc on Wednesday before closing 0.09 per cent lower at 0.8908.

The dollar closed 0.06 per cent lower at 133.66 against the yen on Wednesday as investors focus on the Bank of Japan's April 28 meeting.

Kazuo Ueda, the new governor of the Bank of Japan, is widely expected to make little noise when he chairs his first policy meeting this week, waiting for markets to calm further after the recent turmoil in the financial sector.

The pound closed 0.43 per cent higher at 1.2457 against the dollar on Wednesday amid speculation about whether the UK would become the first central bank in a developed European or US economy to suspend interest rate rises.

Ramsden, deputy governor of the Bank of England, said inflation was likely to become more persistent and that the Bank must stop the risk of high inflation from seeping into the economy. Similarly, Jeremy Hunt, chancellor of the exchequer, said in a statement that the latest inflation figures reaffirmed why efforts to bring inflation down must continue "so that we can relieve pressure on households and businesses. We are moving towards that goal".

Mr. Peel, the BoE's chief economist, said signs of persistent inflation would justify further rate rises, and that policymakers needed to be alert to the risk of "persistent inflation" and act accordingly to reduce consumer price inflation to its 2 per cent target

Numerous analysts who had earlier predicted that the Bank of England might pause interest rate hikes in May have "reversed course", sharply raising the probability that the Bank of England will raise interest rates in May. Standard Chartered expects the Bank of England to raise interest rates in May by 25 basis points. Unexpectedly high labour market and inflation data have added pressure on the Bank of England to raise interest rates.

Thursday's key data and events

Institutional Perspectives Summary

1. JPMorgan strategist: The Federal Reserve is expected to cut interest rates in September, and the economy is approaching a recession.

① Bob Michele, chief investment officer for fixed income at JPMorgan Chase, said the Federal Reserve would start cutting interest rates in September because economic data showed the US was heading for recession. He expects inflation to be below 3 per cent at annualised three- and six-month rates when the Fed starts cutting rates;

② Michele said the pace of interest rate hikes had largely hit the system, with regional banking crises part of the problem. However, he said the Fed's tightening cycle was not yet over and another "unnecessary" rate hike would be made at the May meeting

2. Brown Brothers Harriman: It is a foregone conclusion that the Federal Reserve will raise interest rates next week.

① Brown Brothers Harriman economists wrote that last night's strong earnings reports from big tech companies helped improve market sentiment and weighed on the dollar. We think it is a foregone conclusion that the Federal Reserve will raise interest rates next week. The odds of another 25 basis points rate hike in June are slim. Between the May and June meetings, the Fed will digest two more jobs reports, two CPI/PPI reports and a retail sales report;

② At this point, a pause in rate hikes in June may just be the most likely outcome, but it really depends on how all this data performs. The price is now two rate cuts before the end of the year, compared to one at the beginning of this week and two at the beginning of last week. In this regard, Powell said that Fed officials "don't think?" will cut rates this year. We agree with this view

3. JP Morgan recommends selling the New Zealand dollar;

JPMorgan Chase said it recommended selling the New Zealand dollar a month ago following news that the New Zealand economy contracted in the final quarter of 2022.

JPMorgan strategist Patrick Locke said that considering the current economic growth momentum, the prospect of future mortgage tightening, and the lower-than-expected CPI this week, the New Zealand dollar is still underperforming, which is understandable

4. Analysts: If the US Quarter 1 GDP is less than expected, the pound may rise again to 1.25;

① Analyst Gary Howes said that the next data on the trend of the pound against the dollar is the preliminary data of the US Quarter 1 GDP (released at 20:30 on April 27, Beijing time).

The figure is expected to be lower than economists at Wells Fargo, the US commercial, retail and investment bank.

③ If they are correct, this surprise could cause the dollar to weaken further, causing the pound to rise back to 1.25 against the dollar.