Forex Trading Reminder: Bulls Suffer Defeat!

In the early Asian trading session on April 13th, Malaysian time, the US dollar index slightly fell by 0.03% and is currently trading near 101.50. The US dollar declined on Wednesday after data showed that consumer prices in the United States rose less than expected in March, raising expectations that the Federal Reserve may stop raising interest rates after the expected hike in May. The US dollar index fell to 101.44 at one point on Wednesday, approaching the two-month low touched last Wednesday, and finally closed down 0.62% at 101.53.

The US Consumer Price Index (CPI) rose by 0.1% in March, below the economists' expected increase of 0.2%, and lower than February's increase of 0.4%. In the 12 months to March, the CPI increased by 5.0%, which is the smallest year-on-year increase since May 2021. In February, the CPI increased by 6.0% year-on-year. Excluding the more volatile food and energy components, the core CPI rose by 0.4% last month, following a 0.5% increase in February. The sticky rent continued to drive the core CPI.

Joe Manimbo, Senior Market Analyst at Convera, said: “The overall inflation rate came in below expectations, which supports the view that the Fed is basically one and done.” He added, “The market was just really cautious ahead of the data release because if it came in hotter than expected, that might imply a June meeting that could potentially hike rates. But I think, as inflation goes from 6% down to 5% in a big step, if this persists and we see a sharp slowdown in the economy, it could give the Fed room to cut rates later this year.”

Goldman Sachs economists said after the data release that they no longer expect the Fed to raise rates in June. Federal funds rate futures traders now see a 71% chance of the Fed raising rates another 25 basis points at its May 2-3 meeting, down from 76% before the data release.

San Francisco Fed President Daly said on Wednesday that while the US economy is strong and the labor market is tight, high inflation suggests that the Fed has “more work to do” in terms of raising rates, but other factors including tightening credit conditions could provide reasons to pause rate hikes.

Richmond Fed President Barkin also said the Fed has “more work to do” in bringing inflation back to its 2% target, as the latest price pressure data is not weak enough. Minutes from the Fed's March meeting also showed that several Fed officials considered pausing rate hikes until it was clear that the failure of two regional banks would not cause broader financial pressure, but they ultimately deemed high inflation to be the top priority.

The market will now analyze Friday's retail sales data to understand how consumer spending is being impacted by price increases.

On Wednesday, the euro briefly rose to 1.10 against the US dollar before closing up 0.75% at 1.099.

Policy makers at the European Central Bank (ECB) on Wednesday said there was a case for further interest rate hikes, but they disagreed on how much was necessary, indicating that the debate over the central bank's next move remains unresolved.

The ECB has raised rates at every meeting since July to fight stubbornly high inflation, but stopped providing policy guidance in the days before its policy meeting after last month's turbulence in the banking sector upended the outlook.

The British pound closed up 0.51% at 1.2484 against the US dollar on Wednesday.

In a report, HSBC senior economist Elizabeth Martins said the Bank of England's appointment of Megan Greene to the Monetary Policy Committee could make the central bank's monetary policy stance slightly more hawkish, replacing Silvana Tenreyro who has voted against rate hikes since September last year.

While Greene's comments in the media have tended to be broadly dovish, Martins added that no one has been more dovish than Tenreyro. However, Greene's arrival may not change the direction of British policy.

Key data and events on Thursday:

Institutional views summary:

1. Capital Economics: The possibility of the Fed raising interest rates again by 25 basis points in May is increasing.

① Paul Ashworth, Chief North American Economist at Capital Economics, emphasized that the minutes of the Fed's meeting showed uncertainty about the impact of the banking crisis.

② He further stated that given the still-strong job growth and elevated core inflation in the US in March, the possibility of another 25 basis point rate hike at the May policy meeting is increasing. However, this is still a difficult decision as March's retail sales and industrial production are likely to have been weak.

2. Rabobank: Risk aversion will prevent the US dollar from falling significantly in the coming months.

① Jane Foley, a foreign exchange strategist at Rabobank, said that the market has lowered its expectations for future Fed rate hikes in the coming months and expects the Fed to cut rates before the end of the year, but the US dollar is unlikely to weaken significantly. The downward revision of rate expectations is based on the view that the US credit environment has tightened. Even if the tight credit environment does not trigger another small crisis, it will increase the risk of a US economic recession.

② The risk of a global economic downturn may cause investors to shy away from high-risk assets, and given the US dollar's safe-haven status, this should prevent the US dollar from falling significantly in the coming months.

3. CIBC: Canadian Imperial Bank of Commerce is expected to keep interest rates unchanged this year.

① CIBC analyst Avery Shenfeld believes that the Bank of Canada will maintain interest rates for the remainder of this year, neither fulfilling its implicit warning of further rate hikes nor meeting the market's expectations of a rate cut before the end of the year.

② Canadian Imperial Bank of Commerce should be patient and can lower inflation to target levels without causing unnecessary economic pain, and it looks like rates may not be eased until 2024. Shenfeld added that it is encouraging that the Bank of Canada believes there is no need to let the economy fully deteriorate to bring inflation on track.

4. Ameriprise Financial: Expects the Fed to not cut interest rates this year;

① Anthony Saglimbene, Chief Market Strategist at financial services company Ameriprise Financial, stated that today's inflation data confirms that inflation trends are moving forward. The Fed will raise rates by 25 basis points in May, but that's it. The market reaction may be a bit ahead of itself because I don't think the Fed will cut interest rates this year. The only possible scenario for them to cut rates this year is if economic growth and inflation deteriorate even faster, which would also be detrimental to the stock market;

② To some extent, investors will have to accept the view that interest rates will remain at a higher level for a longer period of time this year, which may bring some tension to the stock market.

5. Société Générale: The USD/CAD may have peaked along with US interest rates;

① Société Générale stated that no one expects a change in the policy interest rate of the Bank of Canada tonight. However, futures traders have established the largest short positions in the Canadian dollar since January 2019. The USD/CAD tracks the relative rates of the United States and Canada, but so far, the biggest driver of this price difference has been the trend of US interest rates;

② We believe that the USD/CAD has peaked and will decline to 1.25 in the next few months, even though sticky core CPI data and a subdued Bank of Canada policy statement may not provide much impetus to this currency pair.

6. Rabobank: The recent strength of the pound may have come to an end.

① Rabobank has stated that the recent strong performance of the pound in the past few weeks reflects a series of better-than-expected economic data in the UK, but its upward momentum may have come to an end. Jane Foley, a foreign exchange strategist at Rabobank, stated in a report that although the UK's economic prospects for 2023 are better than in the past, they are still not strong enough, and recent position adjustments mean that the pound may now be more vulnerable to negative news.

② Rabobank expects the pound against the euro to slowly decline, although it recently predicted that the euro against the pound would reach 0.90 over the next nine months.

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