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Hello everyone, today XM Foreign Exchange will bring you "【XM Foreign Exchange】: Collection of positive and negative news that affects the foreign exchange market". Hope it will be helpful to you! The original content is as follows:
The US CPI in April increased by 2.3% year-on-year, lower than market expectations 2.4%, hitting a new low since February 2021. Core CPI increased by 2.8% year-on-year, the same as expected. Data shows that the U.S. inflation pressure is moderate, and market expectations for the Federal Reserve's interest rate cut have risen slightly. FedWatch shows that the 2025 rate cut is expected to be 2.3 times/56.9bp, and the first rate cut may be held in the September meeting. This data weakens the momentum for the US dollar to strengthen in the short term, which is negative for the US dollar index. However, we need to be wary of the gradual emergence of tariff impacts in subsequent data, which may push up inflation of core commodities.
British BRC same-store retail sales increased by 6.8% year-on-year in April, far exceeding the expected 2.3%, with the previous value of 0.9%. Overall retail sales increased by 7.0% year-on-year, significantly higher than the previous value of 1.1%. The sales growth of clothing and household goods was particularly prominent, reaching 9.5% and 8.2% respectively. The data reflects the rebound in consumer confidence and policy stimulus effects, providing strong support for the pound and may push the pound up against the dollar.
The initial value of the euro zone manufacturing PMI in May was 44.6, lower than the expected 46, hitting a new low since May 2020. The initial value of the service industry PMI was 55.9, slightly higher than expected, but the initial value of the comprehensive PMI was 53.3, down from the previous value. Continuous contraction in manufacturing shows weak economic recovery in the euro zone, coupled with the ECB suggesting another rate cut in the summer, the euro faces downward pressure in the short term. However, European Central Bank President Lagarde stressed that European stability attracts capital, and the euro-dollar exchange rate has recently rebounded against the trend to 1.1188, and we need to pay attention to subsequent policy adjustments.
Although the April CPI data is moderate, Fed officials' concerns about the impact of trade policy have intensified. St. Louis Fed Chairman Mousalem pointed out that trade tensions could lead to the risk of stagflation, while Cleveland Fed Chairman Hamak warned that tariff policies could trigger economic uncertainty. The market has differences on expectations of the Federal Reserve's interest rate cuts, with traders expecting two interest rate cuts this year, but the time point for the first rate cut may be postponed to September. In addition, Moody's downgraded the US sovereign credit rating to Aa1, and long-term debt problems (over $36 trillion) continued to suppress US dollar confidence. The US dollar index fell below the 100 mark, with an intraday decline of 0.03%.
The ECB lowered three key interest rates by 25 basis points to 2.40% in April and suggested another rate cut in the summer to cope with economic weakness. The Management Committee said that the possibility of interest rate cuts in June cannot be ruled out, but it needs to wait for the latest quarterly forecast. Despite the weak economic growth of the euro zone, European stability attracted international capital, with the euro-dollar exchange rate rebounding to 1.1188 recently. If the EU countermeasures against US steel and aluminum tariffs (including 95 billion euros of goods) are implemented, it may further affect European and American trade relations and intensify euro fluctuations.
The Bank of Japan has recently released a signal of interest rate hikes, and the dollar against the yen exchange rate rebounded from around 148 to 144.095. However, Japan's manufacturing PMI shrank to 48.4 for the ninth consecutive month in March, and the corporate price index hit a record high of 8 months, indicating that the momentum for economic recovery is insufficient. Tensions in the Middle East have pushed up crude oil prices. As an energy importer, Japan's trade balance may deteriorate, and the yen faces two-way pressure in the short term. In addition, the progress of Sino-US trade negotiations has caused fluctuations in the yen exchange rate, which fell to 148 yen/USD on May 12. We need to pay attention to changes in the interest rate spread between geopolitics and the United States and Japan.
U.S. intelligence shows that Israel may attack Iran's nuclear facilities, and geopolitical tensions are intensifying. WTI crude oil prices jumped 3% to $64.19 per barrel, hitting a new high in the past four weeks, pushing gold prices to break through $3,300 per ounce. The yen was supported as a safe-haven currency, with the dollar falling to a two-week low of 144.095 against the yen, but rising crude oil prices may worsen Japan's trade deficit and weaken the long-term support of the yen. If the conflict escalates, it may cause concerns about global energy supply and further push up safe-haven assets.
China-US reached a "Memorandum of Economic and Trade Cooperation" and canceled additional tariffs in stages.The first phase (July 1) will cancel the 65% commodity tariff to boost market risk appetite. This progress has eased global trade tensions, negative demand for US dollar hedging, promoted the RMB exchange rate to stabilize, and the onshore and offshore price spread narrowed to 3 basis points. However, the United States still retains a 5% strategic area buffer rate, and high tariffs may be restored after a 90-day grace period, so we need to be wary of uncertainty in subsequent negotiations.
Tenuous situation in the Middle East pushes up oil prices, but slowing growth in shale oil production in the United States (reduced drilling rig count and 9% reduction in capital expenditure) may partially offset supply pressure. Rising oil prices are beneficial to the currencies of oil exporters (such as the Canadian dollar), but put pressure on the currencies of importers such as Japan and India. In addition, if the Iran nuclear agreement is reached, it may release 300,000 to 400,000 barrels per day supply, suppressing oil prices for a long time.
The US 30-year Treasury yield is approaching 5%, and the 10-year yield has risen to 4.48%. The rise in long-term yields reflects the market's concerns about debt issues. The steeper yield curve may attract overseas capital inflows, but Moody's downgrades and deteriorate fiscal deficits (the deficit of $1.3 trillion in the first half of fiscal 2025) weaken the credit foundation of the dollar. The US dollar may remain volatile in the short term, but long-term debt risks may curb the US dollar's strength.
Dollar/JPY: Bank of Japan hawkish signals and Middle East safe-haven demand support the yen, which may test the 143 mark in the short term, but rising crude oil prices may limit the gains.
Euro/USD: Eurozone economic weakness and interest rate cut expectations suppress the euro, but European stability attracts capital, and the exchange rate may fluctuate between 1.11-1.13.
GBP/USD: Strong retail sales in the UK are positive for the GBP. If the 1.28 mark is broken, it may open upward space.
Australia dollar/USD: The RBA cut interest rates to 3.85% for the second time this year, and the Australian dollar is under pressure. We need to pay attention to China's economic data and iron ore prices.
Geopolitical risks: Middle East conflict, progress in Sino-US trade negotiations, US debt ceiling negotiations, etc. may cause severe market fluctuations.
The central bank's policy shift: The pace of monetary policy adjustments in the Federal Reserve, the European Central Bank and the Bank of Japan may exceed expectations.
Data and Events: Pay attention to the euro zone service industry PMI in May, Japan's April CPI and G7 Finance Ministers' Meeting on Thursday.
Summary: On May 21, the foreign exchange market was intertwined with long and short factors, the US dollar was suppressed by the expectation of interest rate cuts and debt problems, the euro and the yen were differentiated due to economic data and geopolitical risks, and the pound was boosted by retail data. Investors need to pay close attention to geopolitical progress, central bank policy trends and economic data release, and flexibly adjust their strategies.
The above content is all about "【XM Foreign Exchange】: Collection of positive and negative news that affects the foreign exchange market", was carefully compiled and edited by the XM Forex editor. I hope it will be helpful to your transactions! Thanks for the support!
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