Foreign exchange trading reminder: interest rate hikes expected to rebound in June + investors seeking safe haven, the dollar refreshes more than two months high

The dollar index hit a two-month high of 103.96, supported by recent signs that the US economy remains resilient, while jitters over the US debt ceiling talks sent investors into safe havens. Inflation in the UK remained much stronger than expected in April, with services and core prices posting their biggest gains in more than three decades, increasing pressure on the Bank of England to raise interest rates.

In early Asian trading on May 24, Beijing time, the US dollar index rose slightly, briefly refreshing the high of more than two months to 103.96, and is currently trading around 103.90. The US dollar index rose 0.37% on Wednesday to close at 103.91, the highest closing price since March 17, supported by recent signs of resilience in the US economy, while unease over the US debt ceiling talks has led investors to safe haven assets.

Analysts said that while the debt ceiling standoff in Washington could lead to a default and push the U.S. economy into recession, unlike some public debt, the market sees no immediate risk to the dollar.

Joe Manimbo, senior market analyst at Convera in Washington, said expectations that the Fed would soon start cutting rates had weakened as US economic data showed resilience and gave the dollar an edge. "There has been a view that if the Fed cuts rates as the market has recently expected and Europe continues to raise rates, the dollar could lose its yield advantage," he added. "There is now some change in the outlook for global interest rates."

After the release of the minutes of the May policy meeting, market bets that the Federal Reserve will raise interest rates at its next meeting in June rose slightly.

Fed officials "generally agreed" in May that the need for further rate rises "has become less certain", but other officials warned that the Fed needed to keep its options open given the risk of persistent inflation.

According to the CME Group's FedWatch tool, the Fed funds rate futures move shows a 35.3% chance of a rate hike by the end of the two-day policy meeting on June 14.

Marc Chandler, chief market strategist at Bannockburn Global Forex in New York, said he suspects the debt ceiling talks have become an issueforeign exchange marketAn important factor in the trend. The dollar has risen more or less for three weeks, helped by stronger-than-expected data and rising U.S. interest rates. Chandler said economic data could continue to support the dollar, with the Atlanta Fed expecting the U.S. economy to grow at an annualized rate of 2.9% in the second quarter.

On Wednesday, the pound fell to a five-week low of 1.2357 against the dollar, and finally closed down 0.39% at 1.2360. Supported by CPI data, it rose to 1.2469 earlier in the session.

Inflation in the UK remained much stronger than expected in April, with services and core prices rising by the most in more than three decades, increasing pressure on the Bank of England to raise interest rates.

On May 24, local time, data released by the Office for National Statistics showed that the UK Consumer Price Index (CPI) rose by 8.7% year-on-year in April, a significant decrease from 10.1% in the previous month, and fell back to single digits for the first time since August 2022.

The UK's April core CPI rose by 6.8% year-on-year, the highest level since March 1992; the year-on-year increase in the commodity CPI fell from 12.8% in March to 10.0%; the year-on-year increase in the service CPI rebounded from 6.6% in March to 6.9%.

Paul Dales, chief UK economist at Capital Economics, said: "Although inflation has fallen to single digits for the first time in eight months, it will increase the pressure on the Bank of England to extend the rate hike cycle through the summer." With inflation even more stubborn than the BoE expects, it is now almost certain that the BoE will raise interest rates from 4.50 per cent to 4.75 per cent in June and then possibly further hikes in the coming months. "

Traders have increased their bets on further rate hikes by the Bank of England's Monetary Policy Committee.

The New Zealand dollar slid on Wednesday after the Reserve Bank of New Zealand raised interest rates by 25 basis points to its highest level in more than 14 years, signalling the completion of its tightening campaign. The New Zealand dollar closed down 2.19% at 0.6107 against the dollar on Wednesday.

Weak retail sales data in New Zealand highlighted recession risks, ANZ said. This has also become a major factor in the negative for the New Zealand dollar.

New Zealand retail sales unexpectedly contracted in Quarter 1, falling 1.4 per cent month-on-month and well below economists' expectations of a 0.2 per cent rise. Miles Workman, senior economist at ANZ, said the data had some downside risks to Quarter 1 GDP forecasts and that the likelihood of a technical recession was increasing. However, the data showed that much of Quarter 1's weak performance came from areas hardest hit by Hurricane Gabriel, meaning there could be some recovery in the second quarter。

The euro closed down 0.19% against the dollar on Wednesday at 1.049.Inflation in the eurozone's core services sector, reported on Tuesday, remains high, and markets expect the European Central Bank to raise interest rates in June and July.

However, the euro zone economy is not as good as expected, weighing on the euro. According to the latest data from S & P Global, the preliminary reading of the euro zone manufacturing PMI in May unexpectedly fell to 44.6, which was lower than market expectations of 46. It further fell below the 50-line level indicating economic contraction and fell to a 36-month low. The preliminary reading of the euro zone services PMI also fell in May, but the reading of 55.9 still pointed to strong economic growth and exceeded market expectations of 55.6.

In addition, strikes continue in many European countries to protest against rising inflation, which has also dealt a blow to the economy and the euro.

Thursday's key data and events

Institutional Perspectives Summary

1. Berenberg: The Bank of England is expected to raise interest rates by 25 basis points in June;

① Berenberg updated its interest rate forecast for the Bank of England after the UK released inflation data for April. Berenberg now expects the Bank of England to raise interest rates by 25 basis points in June, after previously putting the likelihood of a rate hike in June at 30%;

② In addition, Berenberg expects the Bank of England to cut interest rates only once in the fourth quarter, compared with two previously expected, raising its interest rate forecast for the end of 2023 to 4.5% from 4% previously, maintaining its expectation of 3% interest rates at the end of 2024 unchanged. Berenberg expects the Bank of England to cut interest rates six times next year, rather than four, by 25 basis points each

2. Citi: The Bank of England is expected to raise interest rates twice more.

① Citibank said on Wednesday that it now expects the Bank of England to raise interest rates twice more than previously expected, and will not cut rates in November due to higher-than-expected inflation data.

However, Citi said that while the hawkish risk posed by the inflation data is relatively large, the details of the data hide some dovish signals, such as the growth rate of inflation in the service sector is not as fast as previously feared.

As cost pressures show signs of easing, Citi still expects the Bank of England to slash interest rates sharply in 2024

3. Societe Generale: The support provided by UK inflation data for the pound is temporary;

Societe Generale (601166) said that after the UK released higher-than-expected inflation data on Wednesday, the market raised interest rate expectations for the Bank of England, but this only provided temporary support for the pound.

After the release of the data, the one-year pound sterling and euro interest rate spread widened significantly, which is likely to continue in the short term, but it is clear that due to Brexit, the balance between inflation and economic growth in the UK is worse than in the rest of Europe. Interest rates in the UK will rise further, and economic growth will have to slow down further, which will be bad for the pound

4. UniCredit Bank: If the United States reaches a debt ceiling agreement, the rise of the dollar may be limited.

① UniCredit Research said that if the US reaches a debt ceiling agreement, the dollar may initially rise, but the decrease in safe-haven demand may erode some of the dollar's gains. Even in this case, the dollar may also find support from investors' moves to further reduce the Federal Reserve's interest rate cut expectations;

② At present, the market expects the Federal Reserve to cut interest rates by 40 basis points before the end of the year, and about 60 basis points by January next year, while the price of interest rate cuts in early May is 75 basis points and 100 basis points respectively. In addition, market expectations for the Federal Reserve to raise interest rates by 7 basis points in June suggest that although the probability of further rate hikes is less than 30%, it is still possible.