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On April 27th, Barclays analysts stated in a report that with inflation remaining high, the Federal Reserve is expected to keep the target range for the federal funds rate unchanged at its meeting this week, but a rate cut is still possible this year. The analysts said, "In a highly uncertain environment, the Fed tends to remain on hold. Strong demand and still relatively high inflation support its patience, and policymakers have also signaled a diminishing confidence in further rate cuts in the near term." The analysts indicated that if inflation falls as expected, the Fed is expected to gain sufficient confidence to begin easing policy around September. "We still expect it to cut rates this year." According to LSEG data, the money market currently prices in a 10 basis point rate cut by the Fed in 2026.The Philippine Department of Energy announced that the United States has approved an extension of the exemption period for the Philippines to purchase Russian oil and petroleum products.Toyota Motor Corp. reported a sales decline in March as demand for its best-selling RAV4 model weakened ahead of a facelift, while the conflict in Iran threatened to cut off key supplies, forcing the manufacturer to potentially reduce production. The company said Monday that global sales (including those of its subsidiaries Daihatsu and Hino) fell 5.8% year-on-year to 983,126 vehicles in March, while global production rose 3.9% to 1.02 million vehicles. These figures suggest that the worlds largest automaker is managing to stay afloat despite rising prices for raw materials such as aluminum and the base cost of auto parts due to the turmoil in the Middle East. Suppliers are preparing for shortages that could last for months, even if the Strait of Hormuz reopens and shipping returns to normal. Refineries need time to resume operations, and shipping companies need to digest the congestion caused by hundreds of ships stranded in the Persian Gulf. Major supplier Denso Corp. said in March that the ongoing conflict had reduced Japans monthly auto production by approximately 20,000 vehicles.Japans leading economic indicators for February came in at 1.3% month-on-month, compared with 0.3% previously.Japans leading indicator final reading for February was 113.3, compared to 112.4 in the previous month.

The US Dollar Index (DXY) Hit a Two-Year High of 101.851 in the Face of Risk Aversion

Drake Hampton

Apr 26, 2022 10:04

The US Dollar Index, which measures the greenback's value against a basket of six currencies, concluded the day up 0.62 percent to 101.735, just shy of the two-year high achieved earlier in the day at 101.851.

 

The market sentiment remains pessimistic, as evidenced by the continued decline in Asian equity futures. Concerns about China's coronavirus outbreak are growing. In Shanghai, the ban was extended to some parts of Beijing, keeping dealers on their toes. Fears of broader Chinese curbs have alarmed investors already concerned about the potential of a global downturn as the Federal Reserve raises interest rates to rein in inflation.

 

Additionally, the Fed's remarks last week increased demand for the greenback. According to the CME FedWatch Tool, investors have fully priced in a 100 percent possibility of a 0.50 percent rate hike at the May meeting.

 

Meanwhile, the 10-year US Treasury yield, the benchmark note, has fallen ten basis points from last week's highs at 2.981 percent, to 2.818 percent.

Fed Speaking Summary from Last Week

On Thursday of last week, Fed Chairman Jerome Powell signaled his support for a half-point rate hike by the May 4-5 meeting. Additionally, San Francisco Fed President Mary Daly stated that the Fed "will almost certainly" hike rates by 50 basis points in the coming months. Daly underlined that the Fed should proceed cautiously with rate hikes and aim to raise interest rates to 2.5 percent by the end of the year.

 

Elsewhere, St. Louis Fed President James Bullard acknowledged that the Fed is behind the curve, but not as much as many believe, while noting that the Fed has previously lifted 75 basis points without the world imploding.

 

Loretta Mester, president of the Federal Reserve Bank of Cleveland, stated last Friday that she hoped to achieve neutrality at 2.5 percent by the end of the year. Mester noted that "we don't need to get there" when asked about 75-bps rises. Additionally, she favored a 50-bps hike in May and a few additional increases thereafter.

 

The US economic calendar would include March Durable Goods Orders, the US GDP for the first quarter, and March Core Personal Consumption Expenditure (PCE) on annual and monthly basis, in addition to the Chicago PMI.

 

According to ING analysts, the US economy increased at a 1-1.5 percent annualized pace in Q1, which would be lower than the 6.9 percent rate recorded in Q4 of 2021, reflecting the pandemic's Omicron wave, which had a significant impact on mobility.

Forecast for the US Dollar Index (DXY): Technical Outlook

As indicated by the daily chart, the US Dollar Index (DXY) maintains an upward tilt. The 50 and 200-day moving averages (DMAs), which are placed at 98.596 and 95.504, respectively, are significantly below the DXY value, reinforcing the upside bias. At 71.24, the Relative Strength Index (RSI) is in overbought zone, indicating that the DXY trend is about to reverse.

 

DXY's initial resistance level would be 102.00. A break above would reveal March's 24 daily high of 102.21, March's 2020 daily high of 102.99, and then the aforementioned 103.82 swing high.

 

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