Forex Trading Alert: "One Comment" by Fed Officials Boosts Dollar Rebound, Euro May Challenge 1.1175

In early Asian trading on April 17th, Malaysia time, the US dollar index edged up and was currently trading near 101.68. The US dollar rebounded from its one-year low on Friday, as some economic data on March retail sales was not as weak as some economists had feared, and a key Federal Reserve policymaker warned that the Fed needs to continue raising interest rates to lower inflation.

The US dollar rebounded from its initial decline, as data showed that US retail sales in March fell more than expected, as consumers reduced purchases of motor vehicles and other large items.

Core retail sales, which correspond most closely to consumer spending in China's Gross Domestic Product (GDP), fell 0.3% last month. However, despite the decline in March, growth in January and February kept consumer spending firmly on track for accelerated growth in the first quarter.

Mazen Issa, senior FX strategist at TD Securities, said, “Aside from the retail control group, or super core retail sales, the data was mostly weak and just a touch below expectations, leaving you with the sense that perhaps the market was looking for something weaker.”

Economists noted that, against a backdrop of very strong January figures, the data still reflects a robust quarter. Thomas Simons, money market economist at Jefferies Financial Group, said in a note, “Personal consumption moderated in February and March, but that was after a surge in spending in January.” “The most important thing is that the weakness in February and March on their own is concerning, but the average for the quarter is much stronger because of the surge in spending in January.”

Investors are pricing in the possibility that the Fed may need to cut interest rates later this year due to expectations of an economic slowdown, but the economy remains relatively strong, leading to volatile trading.

Issa said, “The primary theme is that the economy is slowing. I think what's being overlooked is that the developments may take longer and may be much more gradual, and the resilience of the U.S. economy is stronger than people think.”

Other data released on Friday showed that US consumer confidence increased in April, but households raised their inflation expectations for the next 12 months. March factory output in the US also fell more than expected, but there was a small increase in the first quarter.

Federal Reserve Board Governor Lael Brainard said on Friday that despite a year of active rate hikes, the central bank had made “little progress” in achieving its 2% inflation target, and rates needed to be raised further.

Atlanta Fed President Raphael Bostic said that raising rates by another 25 basis points would give the Fed some confidence that inflation will return steadily to its 2% target when the tightening cycle ends. Chicago Fed President Charles Evans also said that a US recession is definitely possible as the impact of the Fed's significant rate hikes in the past year fully materializes in the economy.

Federal funds rate futures traders believe that there is an 81% chance that the Fed will raise rates by 25 basis points at its meeting on May 2-3.

The US dollar index fell to 100.78, its lowest level since April last year, before rebounding and closing up 0.57% at 101.59 on Friday. However, the index remained on a downward trajectory for the fifth consecutive week.

Boosted by the divergence in interest rate expectations between the US and Europe, the euro rose to its highest level since April 2018, touching 1.1075 against the dollar before falling to 1.0989 at the end of last week. Charalampos Pissouros, Senior Market Analyst at XM.com, wrote that the euro is testing 1.10 against the dollar as the market expects the European Central Bank to raise interest rates. If the euro breaks through 1.1035, it will target the high of 1.1175 from March 31, 2022.

Last Friday, the pound rose to 1.2546 against the dollar before falling and closing down 0.84% at 1.2413. Nomura Securities noted that due to the weakening of the dollar and the improvement in market sentiment towards the UK economy, the pound has risen from 1.21 in January to 1.25 in early April, making it one of the best-performing major currencies this year. However, the Bank of England's recent hesitation on the issue of interest rate hikes has put short-term pressure on the pound, leading to a decline in the past two days.

Nomura Securities commented that they believe the pound will continue to rise against the dollar this year, but advise investors to wait for the Bank of England to reassess before getting involved. Jordan Rochester, an analyst at Nomura, said, “If someone thinks that the Federal Reserve has completed its interest rate hikes, then it may be a reasonable short-term target for the pound to rise above 1.30 against the dollar this year. But we also need to pay attention to the Bank of England's policy.”

The Financial Times previously predicted that the Bank of England will raise interest rates twice before September this year, each time by 25 basis points, or 0.25%, raising the benchmark rate from 4.25% to 4.75%.

Key Data and Events on Monday

Summary of Institutional Views

1. United Overseas Bank: GBP/USD may test 1.2600;

Market strategist Quek Ser Leang and senior forex strategist Peter Chia of United Overseas Bank believe that the ongoing upward momentum may prompt GBP/USD to challenge 1.2600 in the coming weeks.

2. The Canadian Imperial Bank of Commerce: Still believes that the Australian dollar will continue to strengthen in the medium term.

The Canadian Imperial Bank of Commerce stated, “We still believe that the Australian dollar will continue to strengthen. This is largely based on our forecast for a weaker US dollar and the momentum from the reopening of the Chinese economy. Earlier this month, the Reserve Bank of Australia announced that it would keep the policy rate at 3.60% and softened its language regarding the need for further rate hikes.”

However, given our expectation of the upcoming CPI data and the hawkish comments from RBA Governor Lowe, we expect the RBA to hike rates by 25 basis points in early May. Overall, the broad-based decline in the US dollar, coupled with China's demand for exports from Australia, should continue to support the Australian dollar in the medium term.

3. Nomura Securities expects GBP/USD to rise to 1.30 by the end of the year, but warns of a dovish turn by the Bank of England.

Nomura Securities strategists stated that the GBP/USD exchange rate has rebounded strongly in recent months and could further rise to around 1.30 by the end of 2023, although any buyer of the pound would have to manage risks involving the Bank of England.

Nomura Securities forex strategist Jordan Rochester said, “If anyone thinks that the Fed has finished hiking, then climbing above 1.30 for GBP/USD this year could be a reasonable near-term target. There is a concern about the Bank of England.”

4. MUFG Bank: CAD is supported in the near term;

MUFG Bank stated: “We believe that the recent developments are supportive of the Canadian dollar and, therefore, we have added new short positions in USD/CAD with a target of 1.2950 and a stop loss at 1.3650.”

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