Foreign exchange trading reminder: Lite debt ceiling agreement has been formed, vigilance against the US index correction, German recession drags down the euro

The dollar index rose slightly in early Asian trading on May 26, Beijing time, and is currently trading around 104.25. The dollar index strengthened for a fourth consecutive session on Thursday, hitting a two-month high of 104.31, as U.S. data showed that the economy remains resilient even during the Federal Reserve's aggressive rate hike cycle. The dollar index closed up 0.31% at 104.22 on Thursday.

Initial jobless claims rose by 4,000 to 229,000 last week, below market estimates of 245,000, and the previous week's figures were revised down sharply, suggesting little sign of a crack in the labour force. Quarter 1 gross domestic product grew at an annualised rate of 1.3 per cent, up from a preliminary reading of 1.1 per cent reported last month.

Erik Bregar, director of FX and precious metals risk management at Silver Gold Bull, said: "We are definitely not seeing the recession that everyone is talking about coming in 2023, so rates are gradually moving higher at the moment as those bets are taken off. That hasn't been fully digested yet, but if we can climb to the 60% or 70% probability of a rate hike, we could have another rate hike in June."

The dollar hit a two-month peak as fears of a U.S. default intensified, drawing additional support from safe-haven demand.

According to CME's Fedwatch tool, the probability that the Fed will raise rates by 25 basis points at its June meeting is about 53 percent, up from about 36 percent on Wednesday. Recent comments from Fed officials suggest that policymakers are divided on whether to continue raising rates. Boston Fed President Collins said Thursday that it may be time for the Fed to pause the rate hike cycle, while Richmond Fed President Barkin said the Fed is in a "test and learn" state when it comes to slowing inflation.

As Washington continues negotiations to raise the $31.40 trillion debt ceiling,Fears of a possible U.S. default have supported the dollar recentlyThe Treasury Department has warned that it will not be able to pay all its bills by June 1 if the cap is not raised.

House Speaker John McCarthy said Thursday night that congressional Republicans and the White House still need to resolve some differences to reach an agreement before the U.S. debt default deadline.According to sources, a deal on the U.S. debt ceiling has taken shape.

As UK data continue to show volatility, the Bank of England is less likely to manage a soft landing for the economy, perhaps weakening the poundOn Thursday, the pound fell to a new low of 1.2307 against the dollar in more than a month, and finally closed down 0.3% at 1.2320.

According to Eikon data, the Bank of England is now expected to raise interest rates by 25 basis points to 4.75% in June. The probability is 98.54%, and there is a small possibility of raising interest rates by 50 basis points. At the close of last Friday, the probability of keeping interest rates unchanged was 25%, and there is a 75% chance of raising interest rates by 25 basis points. There is no expectation of raising interest rates by 50 basis points.

The Bank of England is not expected to raise interest rates by more than 25 basis points in June due to concerns about the impact of high interest rates on the mortgage market, and it is likely to raise rates by a final 25 basis points in June, analysts at Morgan Stanley Research said in a note. Analysts said the market currently expects end point rates to be above 5%, and we think the Bank of England is still aware of the fragility of the UK mortgage market. With bank rates already at strictly restrictive levels, a small rate hike appears to be the best plan.

The euro continued to fall against the dollar on Thursday, falling to 1.0706 at one point, a new low in nearly two months, and finally closed down 0.24% at 1.0724.Weak economic growth in several major eurozone countries has weighed on the euro.

A worsening business climate in France points to weak GDP growth in the coming quarters, ING has warned. Charlotte de Montpellier, a senior economist at ING, said indicators of business sentiment in France fell to their lowest level in two years, with significant declines in services, industry, retail and wholesale trade. Signs of a worsening situation have been accumulating for months, she said, but so far they have not affected the outlook. It now appears that French economic activity will slow across the board from the second quarter. With the labor market also showing early signs of weakness, business leaders taking a more pessimistic view, persistently high inflation, expectations of weak global growth and the impact of monetary tightening becoming more pronounced, French GDP growth is likely to weaken in the coming quarters.

Klaus Vestesen, chief eurozone economist at Panson Macro, said in a note that the cut in Quarter 1 GDP in Germany probably did not mean further contraction in the coming quarters, but there was no sign of a strong recovery either. Quarter 1 GDP contracted 0.3 per cent, less than initially expected, with higher interest rates and tighter credit standards now starting to take their toll: lower investment volumes and a surge in net exports fading away. "We expect German GDP growth to be close to zero in the second and third quarters, and to pick up again in the fourth quarter, barring a very cold winter in Europe," he added. Moreover, overall eurozone GDP could also be revised down as a result.

The German recession will shake the faith of many who bet on a stronger euroAfter the German economy contracted in the fourth quarter, it also unexpectedly contracted in the first quarter. GDP in the first quarter fell by 0.3% compared with the previous quarter, which is expected to be flat; it fell by 0.2% compared with the same period last year, and is expected to grow by 0.2%. The economy fell by 0.5% year-on-year on a seasonally adjusted basis, and the previous value was down by 0.1%.

Key data and events on Friday

Institutional Perspectives Summary

IG Markets analyst: The dollar index could rise another 2%, target 106.

Tony Sycamore, an analyst at IG Markets, said there are good reasons for the dollar's steady rise. He also pointed to the emergence of safe haven demand in the debt ceiling standoff and the growing signs of economic slowdown in major Asian countries and Europe, suggesting that the dollar could rise by another 2%.

Sycamore said that if it effectively breaks through 104, the index could test 106.

2. Bank of America: It is too early to call for buying Japanese stocks and yen.

With the Japanese stock market at its highest level in 30 years, Bank of America strategists predict that the yen will fall further from current levels.

② Although the Bank of Japan's extremely dovish monetary policy contrasts sharply with global central banks that maintain high interest rates, strategists say the Bank of Japan's practice of buying Japanese stocks while buying yen is likely to occur next year, not this year.

③ Interest rate and equity strategists, including Mr. Yamada and Tony Lim, believe the term "buy Japan" - used to call for investors to buy Japanese stocks and the yen - is "premature";

3. Deutsche Bank: Concerns about the Bank of England's ability to control inflation hit the pound;

Ulrich Leuchtmann, a foreign exchange analyst at Commerzbank, said in a note that sterling's positive reaction to Wednesday's higher-than-expected UK inflation data was short-lived, given market fears that the Bank of England would struggle to contain uncontrolled price pressures; inflation is "eroding the domestic purchasing power of the pound at a high rate - which is damaging the pound's domestic purchasing powerforeign exchange marketThe purchasing power is unfavorable; "

The lack of cheap labor in Europe and the rising cost of goods trade with Europe due to new customs and regulatory borders are among the factors contributing to inflation.

4. Saxo Bank is bearish on the pound;

① John Hardy, strategist at Saxo Bank, said: "A stagflationary economy leaves fiscal and monetary authorities in a bind with no room for manoeuvre;"

Hardy said that it is safe to say that the pound is back on the negative watch list, and it appears that the pound will fall further against the dollar, initially focusing on local support in the 1.2350 area.

5. Rabobank: The surge in gilt yields has unsettled the pound;

① Rabobank said the rise in gilt yields to their highest level since former prime minister Truss unveiled his "disastrous" fiscal plan in September had rattled investors and sterling. While markets raised expectations of a rate rise by the Bank of England, sterling failed to hold on to its initial gains as investors' memories of Britain's poor fiscal management returned to their consciousness;

② The government's stance has changed significantly since last September, but many underlying weaknesses in UK fundamentals remain. The pound could fall to 1.22 against the dollar in three months from its current level of around 1.2354;

6. Goldman Sachs: The euro is unlikely to break above its near-term range against the dollar.

① Goldman Sachs analysts pointed out that unless there are more divergence signals in favor of the euro area, the European and American currency pairs are unlikely to rise above the near-term range. Analysts also pointed out that we have maintained our year-end target of 1.10, and although this level has been tested twice, we expect this volatility to continue as the market reassesses the relative policy path;

We expect the dollar to strengthen more in the near term than the market is currently pricing in, and the dollar may not depreciate more this year than the market expects.