ISM data weighs on the dollar, European and American currencies hit two-month highs, sterling continues to perform well

2023-04-04 17:21:02

Following the rally witnessed earlier in the week, the US Dollar Index turned negative on disappointing ISM manufacturing PMI data, closing deep into negative territory on Monday. Despite the cautious sentiment, the index extended losses during the European morning session. JOLTS job openings and factory orders data for March, IBD/TIPP economic optimism index, and FOMC L. Cook (permanent voter, centrist) speech will be featured on the US economic calendar.

Business activity in the U.S. manufacturing sector continued to contract at an accelerated pace in March, the ISM's monthly survey showed. The price paid sub-index also fell below 50, indicating a decline in imported inflation. Following the report, the dollar came under renewed bearish pressure, with the benchmark 10-year U.S. Treasury yield falling below 3.5%. On Tuesday, the U.S. dollar index held at its lowest level in two months below 102.00, while the 10-year Treasury yield traded slightly above 3.4%.

Meanwhile, U.S. stock futures traded slightly lower, signaling the market's cautious stance.

On Monday, the fed funds futures market priced in a 65 percent chance that the Fed would raise rates by another 25 basis points in May. Futures traders are also pricing in a pause in rate hikes in June and a rate cut in December.


Although EUR/USD retreated slightly after climbing above 1.0900 on Monday, it appeared to regain traction early Tuesday. Optimism surrounding European currencies - and overall risk appetite - appears to be doing well, now lifting EUR/USD to multi-week highs around 1.0940 on Tuesday.

The sustained tone in the greenback continues to underpin the apparent uptrend in EUR/USD, which appears to be running into additional headwinds amid recent hawkish tones from some ECB speakers and the prospect of the Fed going into pause mode in May.

Earlier in the euro zone, Germany posted a trade surplus of 16 billion euros in February. Later, euro zone producer prices are to be released, followed by the ECB's survey of consumer expectations.

European Central Bank (ECB) policymaker Mario Centeno is due to speak later in the day.

Price action around the euro should continue to keep a close eye on the dollar, as well as the nascent disagreement between the Fed and the ECB when it comes to the bank's intentions on the potential next move on interest rates.

Looking ahead, the ECB's hawkish rhetoric continues to support further rate hikes, although this view appears to contrast with some loss of momentum in the region's economic fundamentals.


GBP/USD has gathered bullish momentum and reached its highest level since June 2022 above 1.2450 on Tuesday. Sterling continues to do well, certainly taking advantage of a weaker dollar. Sterling corrected further as hawkish Fed bets on rising oil prices plunged. This was all thanks to weaker-than-expected U.S. ISM manufacturing PMI data, which fueled recession fears.

S&P 500 futures recovered some of the losses in the Asian market, indicating a recovery in risk appetite among market participants. It is difficult for the US dollar index to extend its rally above 102.20 because of the lack of support from economic indicators.

Bank of England policymaker Silvana Tenreyro and chief economist Huw Pill are to speak.

ING economists report that if Peel chooses to play up the welcome signs of easing constraints in the UK labor market, expectations for future BoE tightening are likely to subside and the pound should weaken.


USD/JPY closed in negative territory on Monday but managed to stage a rebound early Tuesday. The pair was last up 0.2% on the day at 132.70.

Ulrich Leuchtmann, head of foreign exchange and commodity research at Commerzbank, analyzed the next Bank of Japan interest rate decision. Leuchtmann believes it would be desirable if the BOJ could communicate a possible policy reversal very gradually. But that's easier said than done. All BOJ watchers are likely to weigh very carefully every word from the new BOJ officials and try to read from it whether we will see a change in direction. This makes "progressive communication" nearly impossible.

He believes that for all market participants with yen exposure, the situation will become "volatile and volatile", especially around the Bank of Japan meeting. The next interest rate decision will be held at the end of this month, which is also the first meeting of the Bank of Japan after the change of leadership, so there is still time to prepare for the yen to rise.

During Asian trading hours, the Reserve Bank of Australia (RBA) announced it would keep its policy rate unchanged at 3.6%, as expected. In its policy statement, the RBA noted that it expected that further tightening of monetary policy would likely be required. After Monday's impressive rally, AUD/USD lost traction following the RBA event and was last down nearly 0.5% on the day at 0.6750.

Spot gold took advantage of falling U.S. Treasury yields to climb above $1,980 on Monday. XAU/USD appeared to be entering a consolidation phase around that level early Tuesday.

After consolidating around $80 for most of Monday, WTI started higher on Tuesday and was last up 1% at $81.15. The Joint Ministerial Monitoring Committee (JMMC) of the Organization of the Petroleum Exporting Countries and its allies (OPEC+) confirmed on Monday that voluntary oil production cuts will reach 1.66 million bpd.

Bitcoin extended its downward correction on Monday but managed to shake off the bearish pressure. At press time, BTC/USD was marginally higher on the day at $28,000. Ethereum recorded a small decline on Monday, but failed to make a decisive move. ETH/USD remained relatively quiet early Tuesday, just above $1,800.



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