Foreign exchange trading reminder: Powell does not rule out continued interest rate hikes in July, the dollar is boosted, the Bank of Japan does not sell the yen fell to a seven-month low

The dollar index closed up 0.48% at 103 on Wednesday after Powell said he would not rule out another rate hike at the Federal Reserve's next meeting in July. Erik Bregar, director of foreign exchange and precious metals risk management at the Silver Gold Bull, said Kazuo Ueda, governor of the Bank of Japan, had shown no desire to block yen weakness and open the door to further yen weakness.

In early Asian trading on June 29, Beijing time, the dollar index fluctuated narrowly and is currently trading around 103.07. The dollar index closed up 0.48% at 103 on Wednesday after a group of global central bank leaders, including Federal Reserve Chairperson Powell, made remarks. Powell did not rule out the possibility of the Federal Reserve raising interest rates again at its next meeting in July.

Speaking at the ECB meeting alongside Bank of England Governor Bailey, European Central Bank President Christine Lagarde and Bank of Japan Governor Kazuo Ueda, Mr. Powell noted that two interest rate hikes were possible this year and did not rule out a rate hike at the next policy meeting on July 25-26. Moreover, Mr. Powell said he did not expect inflation to fall back to the Fed's 2 per cent target until 2025.

According to CME's FedWatch tool, the likelihood of a 25 basis point rate hike at the July meeting rose to 81.8 percent from 76.9 percent a day earlier.

Erik Bregar, director of FX and precious metals risk management at Silver Gold Bull, said: "There are no big changes. To me, they are all about what they said at the recent policy meeting."

Earlier economic data showed that the US goods trade deficit narrowed in May as imports fell, but the improvement may not be enough to prevent trade from weighing on growth in the second quarter. However, the drag on gross domestic product from trade may be offset by an increase in inventory investment.

The dollar hit a seven-month high of 144.61 against the yen on Wednesday, which has been under pressure as the Bank of Japan remains a maverick among the world's major central banks with loose monetary policy. Kazuo Ueda, governor of the Bank of Japan, said on Wednesday that if there was "reasonable confidence" that inflation would pick up in 2024 after a period of moderation, the central bank would have good reason to shift monetary policy.

The weakness of the yen has prompted Japanese officials to warn this week that the central bank may intervene to prop up the yen, the last time this happened the dollar was trading around 145 against the yen.

"The only thing that is notable to me is that Mr. Ueda has not shown any desire to block yen weakness, so if his position is that the policies of other G7 countries are more of a factor in yen weakness, he is really opening the door to further yen weakness now," said Mr. Bregar.

The dollar is trading above 144.00 against the yen, prompting more disapproval from officials. However, yen analysts at Citibank believe intervention is still a long way off. They expect finance ministry officials to start speaking more forcefully from 145.00, but do not expect any real intervention until the 150.00 mark is threatened. They also believe there is still room for the euro to rise to 160.00 against the yen. Foreign exchange options show concern about the risk of potential volatility in the yen.

The euro jumped nearly 40 points to 1.0962 against the dollar on Wednesday, as European Central Bank President Christine Lagarde said she did not see enough substantive evidence that underlying inflation was falling. The pair then retreated, closing down 0.44% at 1.0912.

Villeroy de Gallo, a member of the European Central Bank's governing council and president of the Bank of France, said that the time the ECB keeps interest rates high is more important than the level of real interest rates, but interest rates are close to the level needed to drive inflation back to its 2% target.

Sterling fell to a near half-month low of 1.2606 against the dollar on Wednesday before closing down 0.89 per cent at 1.2634 as Bank of England Governor John Bailey suggested rates could remain at their peak for longer than traders currently expect, which could limit the pound's decline.

Mr. Bailey told a panel at the European Central Bank forum: "I've been interested in the fact that we're dealing with more persistent inflation and the market thinks interest rates are only going to peak for a short time. My response to that is, let's wait and see."

Mr. Bailey also pointed out that the BoE's interest rate decisions were "largely evidence-driven". Inflation was more persistent than expected as rising wages tightened the labour market and the economy became more resilient. But he denied that the labour market tightness was being driven by Brexit, attributing it to the response to the epidemic.

Analysts said the biggest concern for Bank of England policymakers was sticky wage growth, which hit 7.2 per cent last month, up 0.4 per cent from the previous month. The BoE was also disappointed with core commodity price inflation, which remains high despite a recent sharp fall in UK manufacturing output price inflation. The BoE blamed wage growth for this, which appears likely to be the reason for last week's 50 basis point rate hike - a more aggressive stance that the central bank is likely to take before wage growth shows signs of slowing.

Thursday's key data and events

Institutional Perspectives Summary

1. UBS: A similar economic outlook could keep the pound stable against the euro.

With no clear divergence in macroeconomic or monetary policy, the pound is likely to remain in a relatively narrow band against the euro, according to UBS. So far this year, economic data from both the euro zone and the U.K. economy have been better than expected or not as bad as feared, UBS analysts said in a note. They said the European Central Bank and the Bank of England are not yet convinced that inflation is continuing to return to target levels, so both are likely to raise interest rates further. The bank's analysts said that similar economic outlooks for the U.K. and the euro zone in the future could keep the pair stable

2. UBS: The pound may extend its recent gains against the dollar.

The pound has been the best performer of the G10 currencies against the dollar this year and is likely to appreciate further over the next 12 months, according to UBS. The currency pair's still attractive valuation, combined with the Bank of England's recent more decisive measures to curb inflation, should support the pound against the dollar, UBS analysts said in a note. In June, they said, the Bank of England accelerated the pace of interest rate hikes, while the Federal Reserve paused. They said that while the Fed may finally raise rates in July, a rate cut could come in late 2023 or early 2024. Lower U.S. interest rates will help pave the way for future dollar weakness. UBS expects the pound to rise to 1.38 against the dollar by June 2024 from its current level.

3. UBS: The market's valuation of the US dollar is too high, and it may weaken in the future.

Maximilian Kunkel, chief investment strategist at UBS Germany, said in a webinar that the dollar was "significantly overvalued" against several other relevant currencies but should weaken in the future, and that the overvaluation was due to significant economic growth and interest rate differentials in the United States, but UBS expects this to "fall in the coming months." The Fed is expected to cut interest rates faster than the European Central Bank, which UBS expects to cut rates for the first time in December, earlier than widely expected

4. Deutsche Bank: If inflation data supports the European Central Bank's stance, the euro may rise.

Commerzbank said the euro could rise if forthcoming eurozone inflation data supports the European Central Bank's restrictive policies. Commerzbank foreign exchange analyst Preferk said in a note that the euro has the potential to rise further if the data scheduled for Friday exceeds expectations. The high inflation rate means the ECB could take more measures as markets believe in the ECB's resolve in fighting inflation. Commerzbank expects the euro to end the quarter at around 1.10 against the dollar

5. French Foreign Trade Bank: Rising interest rates in the UK hurt the economy, causing the pound to weaken.

Analysts at Natixis said the pound could weaken in the second half of the year due to the impact of the recent sharp rise in interest rates on the economy. "The continued rise in base rates will only exacerbate the deterioration in economic activity, especially in the housing market," they said. They also believe that the Bank of England may not raise interest rates as much as market expectations, which will further weigh on the pound. The pound has appreciated sharply since May and has remained relatively stable since the start of the year, driven by expectations that high inflation will lead the Bank of England to tighten monetary policy further. They expect the euro to rise to 0.8800 against the pound by the end of the year from the current 0.8597

6. Nomura believes that the euro's rebound will continue into the second half of the year.

The euro's rebound against the dollar will continue into the second half of the year, according to a new strategy report from Nomura, which argues that the worst of eurozone economic data may be over.

② Jordan Rochester, strategist at Nomura, said: "We maintain that the recent euro-dollar volatility will not last long, with the euro in 2023 almost the opposite of 2021. Energy prices are likely to remain low or fall due to the global slowdown, supporting the eurozone's terms of trade;"

③ Nomura's strategy team is long the euro against the dollar, with the goal of rising to 1.12 by the end of August and possibly 1.16 next year.