19 May 2022 – Fed Policy is the Main Concern

FOREX

U.S. Dollar Index

The dollar was down on Thursday morning in Asia. Safe-haven currencies slowed after the big gains during the last session. However, concerns are growing that tighter monetary policies from the U.S. Federal Reserve and other global central banks could impact economic growth.

The U.S. Dollar Index inched down 0.03% to 103.65 after a 0.55% jump during the previous session that ended the U.S. currency’s three-day losing streak.

The benchmark 10-year U.S. Treasury yield steadied around 2.89% in Tokyo trading, falling from a high of 3.015% hit during the prior session.

However, investor sentiment remains fragile despite safe-haven assets cooling a recent rally. Fed Chairman Jerome Powell embraced his hawkish tone to date earlier in the week, saying the U.S. central bank would hike interest rates as high as needed to stem a surge in inflation that threatened the foundation of the economy.

Euro

The euro was up 0.2% at 1.048 against the dollar on Thursday as investors price in the chance of an aggressive near-term tightening path by the European Central Bank.

Money markets are currently pricing in 106 basis points (bps) of ECB rate hikes from around 95 bps on Tuesday before ECB official Klaas Knot signaled a 50-basis-point rate increase was possible in July.

Risk appetite in the currency market is fragile as stocks slid, tracking a steep Wall Street selloff, with investors worrying about global inflation and the Ukrainian war.

The attention is focused on the release of the minutes of the last ECB meeting, with investors looking for clues for a potential timetable for monetary policy tightening.

Japanese Yen

Japan’s yen lost ground versus the dollar in March and April, while it has been rangebound recently, the pair fell 0.2% to 128.5 on Thursday.

On Tuesday, the Bank of Japan said it intended to stick with its dovish stance and maintain the current monetary stimulus to create sustainable increases in prices.

Despite these safe-haven assets cooling after a recent rally, sentiment remains fragile on mounting concerns that aggressive tightening by the Federal Reserve and other global central banks could choke growth.

Australian Dollar

The Australian dollar shook off the smaller-than-forecast increase in the employment change, which was 4,000 in April 2022. The latest employment data also showed that the full employment change was 92,400 and the unemployment rate was 3.9%. The Aussie rose 0.2% to 0.6969 against the U.S. currency.

Australia’s unemployment rate stood at its lowest in almost 50 years in April, a tightening in the labor market that will ratchet up pressure for further rate hikes.

Indices

U.S. Indices

Wall Street ended sharply lower on Wednesday, with Target losing around a quarter of its stock market value and highlighting worries about the U.S. economy after the retailer became the latest victim of surging prices.

It was the worst one-day loss for the S&P 500 and Dow Jones Industrial Average since June 2020.

Rising inflation, the conflict in Ukraine, prolonged supply chain snarls, pandemic-related lockdowns in China and monetary policy tightening by central banks have weighed on financial markets recently, stoking concerns about a global economic slowdown.

Additionally, Jerome Powell vowed that the U.S central bank will raise rates as high as needed to kill a surge in inflation that he said threatened the foundation of the economy.

Traders are pricing in 50-basis point interest rate hikes by the Fed in June and July.

The S&P 500 lost around 4.04% to end the session at 3,923.68 points. The Nasdaq declined 4.73% to 11,418.15 points, while Dow Jones Industrial Average shed 3.57% to 31,490.07 points.

European Indices

European stock markets traded sharply lower Thursday, continuing the global selloff with investors unnerved by fears over widespread inflation and a potential global economic slowdown. The DAX traded 1.9% lower, the CAC 40 fell 1.8%, while the FTSE 100 dropped 1.6%.

The minutes from the latest European Central Bank meeting are due for release later in the session, with investors looking for clues for a potential timetable for monetary policy tightening.

Oil prices stabilized Thursday after the previous session’s losses.

Data from the Energy Information Administration, released late Wednesday, showed U.S. crude oil inventories fell 3.4 million barrels for the week ended May 18, an unexpected drawdown, suggesting substantial demand.

Oil prices have generally been rising as Russian supply is squeezed by bans from several countries in the wake of the invasion of Ukraine.

The European Union has also proposed a phased total ban on Russian oil imports in six months’ time, although these measures have yet to be adopted.

Metals

Gold was slightly down to $1,812.34 this morning in Asia, with a steady dollar and elevated Treasury yields.

The yellow metal has seemed to track daily moves in both the dollar and benchmark U.S. 10-year Treasury yields. The greenback rising near 20-year highs pushed gold to its lowest in well over three months on Monday. Fed Chairman Jerome Powell said that the Fed would hike interest rates as needed to curb inflation.

About other metals, silver inched up 0.1%, platinum fell 0.9% and palladium was down 0.6%.