03 May 2022 – Daily FX Update

Overview

Fed starts a two-day meeting

Eurozone Unemployment improves

Gold is at the lowest since February

FOREX

U.S. Dollar Index

The dollar was down on Tuesday morning in Asia, with the Fed widely expected to further tighten its monetary policy as it begins its two-day meeting. The U.S. Dollar Index was down 0.29% to 103.23, while it held just below a 20-year high against a basket of currencies on Monday.

The Fed will hand down its policy decision on Wednesday and is expected to hike rates by 50 basis points, the biggest hike since 2000. The central bank is also expected to announce plans to trim its $9 trillion balance sheet. However, some investors are even holding out for the possibility of a 75-basis point hike, or a faster pace of balance sheet reduction than currently expected.

Euro

The European Union is preparing the latest sanctions on Russian oil sales in response to Russia’s invasion of Ukraine on Feb. 24. Germany, Russia’s biggest energy customer, has changed its stance that could deprive Russia of a large revenue stream within days.

The Eurozone Unemployment Rate dropped to 6.8% against 6.7% expected and 6.9% reported in February, the latest data published by the Eurostat showed on Tuesday. The Producer Price Index (PPI) in the bloc rose to 5.3% MoM in March vs. 5% expected and 1.1% previous. On an annualized basis, the PPI surged 36.8% in March, beating expectations of a 36.3% increase and 31.5% last.

Meanwhile, EURUSD is losing the recovery momentum on the mixed Eurozone data releases. The spot pair was trading at 1.0499, down 0.05% so far.

Chinese Yuan

In Asia Pacific, ongoing concerns about China’s latest COVID-19 outbreak and its impact on the country’s economic impact helped cap the dollar’s losses. The city of Shanghai reported 58 new cases outside areas under strict lockdown on Monday, while the capital city of Beijing resumed its mass testing program. The USDCNY pair was steady at 6.6083 with Chinese markets also closed for a holiday.

Japanese Yen

The Japanese Yen gained ground against the greenback as the USDJPY pair inched down 0.05% to 130.07, with Japanese markets closed for a holiday.

Meanwhile, the Japanese yen continued to remain near 20-year lows reached against the dollar on Thursday, after the Bank of Japan strengthened its commitment to keep interest rates low and pledged to buy unlimited amounts of bonds daily to defend its yield target.

Indices

U.S. Indices

U.S. stock futures rose early Tuesday morning after the major averages staged a big reversal to start the month. Dow Jones Industrial Average futures rose 80 points, or 0.24%. S&P 500 and Nasdaq 100 futures were also up by 0.28% and 0.34%, respectively.

On Monday, the major averages posted a wild up-and-down session amid the Nasdaq Composite rising 1.63% in a late-day comeback, despite falling as much as 1.07% earlier. The S&P 500 rose 0.57% after hitting a new 2022 low earlier in the session.

The benchmark 10-year Treasury yield also climbed to a new milestone on Monday. The bond yield hit 3.01% during the session, its highest point since December 2018.

European Indices

European stock markets opened higher Tuesday, starting the new month on a positive note as investors await more corporate earnings and the prospect of key central banks tightening monetary policy. A lot of attention will be on central banks this week as a number hold policy-setting meetings that could determine market sentiment for weeks to come.

The DAX futures contract traded 0.6% higher, CAC 40 futures climbed 0.6%, and the FTSE 100 futures contract rose 0.6%. The Bank of England will also hand down its policy decision on Thursday and is expected to raise interest rates to their highest level in 13 years. Meanwhile, German unemployment data for April are due later in the session along with the March Eurozone PPI release.

Metals

Gold prices dropped on Tuesday to their lowest since February this year, as the dollar and an imminent interest rate hike by the U.S. Federal Reserve dampened bullion’s appeal as an inflation hedge.

Spot gold was down 0.3% at $1,858.10 per ounce. Bullion fell more than 2% on Monday to its lowest since Feb. 16, as the dollar and yields strengthened on increased prospects for faster rate hikes by the U.S. central bank. U.S. gold futures were also down 0.3% at $1,857.20.

The U.S. central bank’s Federal Open Market Committee will begin its meeting on interest rates later in the day and is expected to hike borrowing costs by half-a-percentage point when it announces its decision on Wednesday.

Spot silver dipped 0.5% to $22.52 per ounce, platinum eased 0.1% to $934.94, and palladium advanced 0.8% to $2,234.12.

Crude Oil

Oil prices slipped on Tuesday in a second day of thin trading in Asia, pulled in opposite directions by China’s COVID-19 lockdowns, which could weigh on fuel demand, and prospects for a supply hit from a possible European oil embargo on Russia.

Brent crude futures fell 0.2% to $107.35 a barrel, tapping out early gains in the day in trading thinned by holidays in China, Japan and parts of Southeast Asia. U.S. West Texas Intermediate (WTI) crude futures similarly dropped 0.2% to $104.94 a barrel, after hitting an intraday high of $105.80. Both benchmark contracts rose more than 0.4% on Monday.

Market participants expect the European Commission to finalise the sixth package of European sanctions against Russia, which might include a ban on buying Russian oil.

Traders will be closely watching U.S. inventory data. The American Petroleum Institute industry group will report stockpiles for the week ended April 29 on Tuesday, followed by government data from the Energy Information Administration on Wednesday.