Foreign exchange trading reminder: data boosts Federal Reserve interest rate hike expectations, the dollar may continue to rise, and zero economic growth in the euro zone may weigh on the euro

On June 30, Beijing time, in the morning of Asian market, the dollar index fluctuated narrowly, and is currently trading around 103.36. The dollar index climbed to a two-week high of 103.44 on Thursday, and finally closed up 0.34% at 103.35, after data showed that the U.S. labor market is still on solid footing, which provided possible support for the Federal Reserve to continue raising interest rates. Claus Vistesen, chief eurozone economist at Panson Macro, said that demand in the euro zone is weakening, forecasting that the second and third quarters of euro zone GDP growth will hover around zero, lower than the European Central Bank's forecast.

In early Asian trading on June 30, Beijing time, the dollar index fluctuated narrowly and is currently trading around 103.36. The dollar index climbed to a two-week high of 103.44 on Thursday and finally closed up 0.34% at 103.35 after economic data showed that the US labor market remains firmly established, providing possible support for the Federal Reserve to continue raising interest rates.

Initial U.S. jobless claims fell by 26,000 last week, to a seasonally adjusted 239,000, below the 265,000 economists surveyed had expected, and the largest drop in 20 months. In addition, the Commerce Department revised Quarter 1 gross domestic product growth to an annualized rate of 2%, from a forecast of 1.4% in May to a previous value of 1.3%.

Federal Reserve Chairperson Jerome Powell hinted at a Bank of Spain event in Madrid on Thursday that Fed policymakers are likely to resume raising interest rates after a pause earlier this month.

Huw Roberts, head of analysis at Quant Insight, said: "For now, the economy remains resilient in the face of all the policy tightening we've seen, suggesting that the Fed and other central banks will have to continue."

Speaking at a meeting of central bankers at the European Central Bank on Wednesday, Mr. Powell said he did not expect inflation to return to the Fed's 2 percent target until at least 2025. In addition, Atlanta Fed President Raphael Bostic said on Thursday that the Fed would have to raise interest rates if price growth veered off target or if inflation expectations began to change in a "difficult way."

Other central bankers attending the meeting, including European Central Bank President Christine Lagarde and Bank of England Governor Bailey, also supported further rate hikes, with the exception of Bank of Japan Governor Kazuo Ueda.

According to CME's FedWatch tool, the market expects an 86.8% chance that the Federal Reserve will raise interest rates by 25 basis points at its July meeting, compared with 81.8% in the previous session, and completely rules out a rate cut this year.

The dollar strengthened against the yen for a third straight day on Thursday, hitting a seven-and-a-half-month high of 144.90 at one point, and the policy plans of the Federal Reserve and the Bank of Japan are expected to remain very different.

Investors are watching to see if the Bank of Japan will intervene again in the yen, which was last near the 145 mark.

The Swedish krona hit a record low of 11.8502 against the euro on Thursday after Sweden's central bank announced a modest increase in its policy rate and accelerated bond sales.

The pound continued to come under pressure against the dollar on Thursday, closing down 0.18% at 1.2611. The Brexit shock has not yet dissipated, and the Bank of England has limited room to raise interest rates, which will continue to weigh on the pound.

Ulrich Leuchtmann, a monetary analyst at Commerzbank, said in a note that the BoE's scope to raise interest rates in the future was "very limited". He said that given the much weaker economic recovery after the epidemic than in the euro zone and the United States, coupled with the significant long-term impact of Brexit, it was clear that the scope of the BoE's monetary policy was limited, and that stability-oriented monetary policy also had limitations. He said that while BoE Governor Bailey dismissed the impact of Brexit in "an almost absurd manner", that did not change that.

The euro closed down 0.46 per cent at 1.0862 against the dollar on Thursday as the eurozone's poor economic outlook threatened to limit the euro's rebound.

Claus Vistesen, chief eurozone economist at Panson Macro, said demand in the eurozone is weakening, continuing to forecast that eurozone GDP growth will hover around zero in the second and third quarters of 2023, lower than the European Central Bank's forecast.

Key data and events on Friday

Institutional Perspectives Summary

Berenberg expects the Bank of England to raise interest rates by 25 basis points in August;

① Berenberg economist Pickering expects the Bank of England to raise interest rates further in August, but he said the uncertainty after that will largely depend on the data. The Bank of England's next interest rate decision will be held on August 3;

② Mr. Pickering said: "We expect a 25 basis point hike in August and a further 25 basis point hike in September, peaking bank rates at 5.5 per cent;"

At the same time, analysts at Schroders raised their forecast for peak UK bank interest rates to 6.5 percent, saying the Bank of England firmly prioritizes inflation over economic growth.

Xiaomo is bearish on the pound and forecasts that it will fall below 1.20 by the end of the year.

In a mid-year foreign exchange review, JPMorgan analysts expect the pound to decline steadily, suggesting that the 2023 rally risks capitulation.

② "Continue to be bearish on the pound," said Patrick R Locke, head of currency strategy at the bank in New York. JPMorgan is bullish on the dollar entering the second half of the year and sees sterling as a candidate to absorb most of the strength

3. Economist at the Swedish Commercial Bank: The hawkish tendency of the Swedish Central Bank has intensified, and two interest rate hikes are expected.

Johan Lof, senior economist at Commerzbank, said the Riksbank showed its hawkish side by raising the base rate by 25 basis points to 3.75 per cent and by a further 30 basis points to the peak of 4.05 per cent, significantly exceeding April's forward guidance. In addition, the Riksbank will accelerate the reduction of assets. Despite the more restrictive policy, the Riksbank raised its GDP forecast, lowered its unemployment forecast, and raised its CPIF forecast excluding energy. "All in all, this shows that they are becoming more aware of the deeper inflation problem." Commerzbank expects two more 25 basis point rate hikes in September and November before starting to cut rates cautiously next summer

4. UBS: The Reserve Bank of Australia may raise interest rates in a row.

UBS expects the Reserve Bank of Australia to raise its cash rate by another 25 basis points to 4.35 per cent in the coming months. UBS chief economist George Tharenou said the most likely time for a rate hike is August, when the RBA will see second-quarter CPI data. But given recent strong labour market data, stubbornly high inflation and the fact that consumers are still spending, the risk to the forecast remains that the RBA could raise rates by 25 basis points in July and then another 25 basis points in August.