US Dollar Declines as Federal Reserve Hints at Rate Hike Pause

Global Markets Remain Flat

The US dollar saw a decline last week as the US Federal Reserve suggested a potential pause in its historic rate hiking campaign. Global equity markets ended mostly flat, with mixed results in US markets. The week was marked by better-than-expected earnings, regional banking concerns, debt-ceiling worries, and optimism surrounding the nearing end of the tightening cycle.

Performance of Major Indices

The US dollar index (DXY index) ended the week lower by 0.4%, while the MSCI All Country World Index remained relatively unchanged. Within equities, the S&P 500 fell 0.8%, the Nasdaq 100 index rose 0.1%, the German DAX 40 advanced 0.2%, and the UK FTSE 100 declined 1.2%. The Hang Seng index rose 0.8%, while Japan’s markets were closed for the Golden Week holiday.

Earnings Season Highlights

In the late stage of the Q1-2023 earnings season, S&P 500 companies are outperforming analyst expectations at their highest rate since Q4-2021. Among the 85% of S&P 500 companies that have reported so far, 79% have reported actual EPS above estimates. Both the number of companies surpassing EPS expectations and the magnitude of these surprises are above their 10-year averages, according to FactSet.

Data Highlights and Central Bank Actions

Data released during the week indicated that China’s manufacturing activity unexpectedly contracted, revealing the uneven nature of the post-Covid recovery. US manufacturing activity (ISM) improved slightly but remained in contraction territory.

The Reserve Bank of Australia surprisingly raised interest rates by 25 basis points and expressed readiness for further tightening to combat inflation. The US Federal Reserve also raised its benchmark rate by 25 bps as expected and hinted at a pause in the tightening cycle. The European Central Bank raised rates by 25 bps and maintained a hawkish stance.

Upcoming Economic Events

In the upcoming week, important events include the release of the Bank of Japan meeting minutes on Monday, Australia’s Westpac consumer confidence data on Tuesday, US CPI and Germany inflation data for April on Wednesday, the Bank of England rate decision, US producer price index for April, and China’s April inflation numbers on Thursday, and the UK Q1 GDP and China’s new yuan loans data on Friday.

Focus on US Inflation and Bank of England Decision

The US inflation data will provide insights into the cooling of price pressures, with core CPI expected to ease to 5.5% on-year in April. Friday’s strong US jobs report prompted a reduction in expectations of a Fed rate cut in July. If price pressures do not ease as anticipated, it may lead to a reevaluation of the current expectations for rate cuts.

It is widely expected that the Bank of England will raise interest rates by another 25 bps at its meeting, following recent wages and inflation data. With inflation remaining in double digits at 10.1%, the UK central bank is likely to maintain a hawkish stance. Given the indication of a rate hike pause by its US counterpart, the relative monetary outlook could result in further gains for GBP.

Weekly Forecast: