Foreign exchange trading reminder: if Powell defends interest rate hikes, it will help the dollar stabilize, and it will be difficult for the Bank of England to raise interest rates significantly

The dollar index closed 0.05 per cent higher at 102.54 on Tuesday. "If Mr. Powell remains steadfast in his defence that the Fed has not finished raising interest rates to tamp down inflation, it could help the dollar stabilise after last week's rout," said senior market analysts at Convera. Jefferies said high UK inflation would last longer as a result of Brexit, but would not trigger a sharp rise in central bank interest rates. UniCredit said the Bank of England could raise interest rates further, but there was limited room for the pound to appreciate.

On Wednesday (June 21), the dollar index fluctuated in a narrow range in Asian morning trading, and is currently trading around 102.53. The dollar index closed up 0.05% at 102.54 on Tuesday. Traders are waiting for Federal Reserve Chairperson Jerome Powell to testify before Congress later this week for clues about the outlook for monetary policy. The Australian dollar fell after the latest policy meeting minutes released by the Reserve Bank of Australia showed that it had considered keeping interest rates unchanged.

Single-family housing starts in the US jumped to their highest level in more than a year in May and future building permit issuance also increased, suggesting a possible turnaround in the housing market after being hit by the Federal Reserve's rate rise. Real estate was the sector hardest hit by the Fed's fastest monetary tightening since the 1980s, but recent data suggest the worst may be over.

Stuart Cole, chief macroeconomist at Equiti Capital, said: "There is a lot of growth in today's numbers and I think the lesson is that the market needs to take the FOMC's warning this month that further rate hikes may be needed more seriously."

Traders will be watching Powell's semiannual monetary policy testimony before the U.S. House Financial Affairs Committee on Wednesday.

Joe Manimbo, senior market analyst at Convera, said: "If Mr. Powell remains steadfast in his defence of the Fed's failure to finish raising rates to tame inflation, this could help the dollar stabilise after last week's rout."

The Australian dollar closed 0.98 per cent lower at 0.6783 against the dollar on Tuesday after minutes from the Reserve Bank of Australia's latest policy meeting showed a "delicate balance" in its decision to raise interest rates in June.

"The minutes put pressure on the Aussie dollar by casting some doubt on the prospect of future rate increases," Manimbo said.

Fears over the property sector weighed on the krona, which rose to a record high of 0.9812 against the franc on Tuesday before closing up 0.24 per cent at 0.9800.

The pound closed down 0.20% at 1.2763 against the dollar on Tuesday. The release of UK inflation data on Wednesday and the Bank of England's interest rate decision on Thursday will all affect the next move of the exchange rate.

Jefferies said that high inflation in the UK will last longer due to Brexit, but it will not prompt the central bank to raise interest rates significantly.

Inflation in the UK is likely to remain high for longer than in the US and other European countries due to factors such as labour market pressures from Brexit, Jefferies said. Mohit Kumar, chief European economist at Jefferies, said: "The reasons we take a negative view on UK inflation include tight labour markets, increased labour constraints due to Brexit, the relative openness of the UK economy and insufficient fiscal policy constraints."

However, he said it was unlikely to trigger a big rate rise by the Bank of England because it wanted to protect mortgage borrowers. "The market is overpricing the BoE rate hike, with peak rates expected to be near 5.9 per cent and we think peak rates will be 5 per cent," Mr. Kumar said.

UniCredit said that the Bank of England may raise interest rates further from the current level of 4.5%, but the room for appreciation of the pound is limited.UniCredit now expects the Bank of England to cut interest rates to a peak of 5.25% in September (previously expected to peak at 4.75%) and cut rates from the third quarter of 2024, bringing the policy rate back to 4.75%. However, as markets have digested the Bank of England's aggressive tightening policy, the pound against the dollar will rise above 1.30 in the second half of 2023 and 2024, but not too far above 1.30.

Wednesday's key data and events

Big things to watch: The U.S. Senate Finance Committee holds hearings on Kugler's nomination to the Federal Reserve Board, Cook's re-election to the Federal Reserve Board, and Jefferson's nomination to be the Fed's vice chairperson.

Institutional Perspectives Summary

1. Fund management company Navellier & Associates: The U.S. economy remains healthy and will support the strong performance of the dollar.

Louis Navellier of Navellier & Associates, a fund manager, said in a report that the US economy remained healthy enough to keep the dollar strong. The US could grow more organically because of its energy independence, agricultural independence and better demographics than Europe. Trade with South East Asia, India, South Korea and Japan is growing steadily. He expects the dollar to remain strong

2. Nordea Bank: The market is too pessimistic about the dollar, and the euro may fall against the dollar.

Analysts at Nordea Bank said that the euro has been volatile against the dollar recently. Interest rates are a key factor behind the euro's decline, while the euro's rise is more difficult to explain. The euro has fallen to 1.06 against the dollar from around 1.11 in early May, but has risen sharply in the past two weeks to the current 1.09. Nordea Bank believes that the market may be too pessimistic about the dollar, and expects the euro to correct downwards to the 1.07 area against the dollar this summer. The euro is likely to trade in the 1.06-1 range against the dollar in the coming months, before moving further higher next year

3. Mitsubishi UFJ: Even if the Turkish central bank raises interest rates, the Turkish lira may fall.

Mitsubishi UFJ said the Turkish central bank, led by its new governor, was expected to raise interest rates sharply on Thursday, but the lira still appeared to weaken as it was allowed more freedom to adjust to a competitive level. However, the bigger the rate rise, the more effective it would be in restoring policy credibility amid signs that Turkey is relinquishing state control to prop up the lira

4. Commerzbank: The current upside potential of the euro is expected to be limited.

The euro's upside potential is likely to be limited in the near term as forthcoming economic data could show some easing of inflationary pressures and prompt European Central Bank officials to become cautious, according to Commerzbank. "There will be a lot of data coming out before September, and no one knows if there will be any surprises in the data," said You-Na Park-Heger, currency analyst at the bank. She said policymakers were likely to be cautious if the data showed some easing of price pressures following recent hawkish comments from ECB members about further rate rises.