Dollar Advances Ahead of US Data; Stocks Seem Wobbly
25 May 2022
It looks like Monday's optimistic mood has quickly evaporated as the USD returned to gains, while stocks and other risky assets were trading lower during the Frankfurt session on Wednesday.
On Tuesday, SP Global announced its May PMI preliminary estimates. Except for the German manufacturing and services indices, which were marginally stronger than April's, other European manufacturing and services indexes fell short of market expectations.
Moreover, business activity in the UK dropped to its lowest level since early 2021, according to the statistics, sending the GBP sharply lower.
Equities in the US and EU dropped notably, although they erased some losses in the final hour of trading. Still, the medium-term trend appears bearish as indices are stuck near their cycle lows, entering or remaining in a bear market territory (down more than 20% off their cycle highs)
RNBZ hikes rates, ECB seems confused
Elsewhere, New Zealand's Reserve Bank increased its Official Cash Rate by 50 basis points to 2.0%. Significant increases now, according to the RBNZ, are more likely to prevent inflation from being too high for too long. As a result, the NZDUSD pair jumped 0.5% in the initial reaction, rising above 0.65 for the first time since early May.
On Tuesday, ECB President Christine Lagarde stated that only 'gradual' rate rises are required if inflation expectations remain stable. However, governors remain divided on whether the ECB should hike by 50 basis points or 25 points or possibly leave the rates unchanged. Nevertheless, the EURUSD pair managed to jump above 1.07 amid some hawkishness by the ECB.
On the economic front, new house sales in the United States fell to their lowest level in over nine years, marking the start of the COVID-19 epidemic. The drop comes as rising building costs and borrowing rates strain affordability.
Today's economic calendar will bring the US durable goods orders for April. Market players expect a decrease from March's levels. However, the numbers are projected to stay in positive territory, possibly strengthening the USD slightly in the initial reaction.
Later, the FOMC minutes from the recent Fed meeting will be published. Markets have already factored in two further 50 basis point Fed rate increases. In addition, investors will closely watch the Federal Reserve's balance sheet reduction strategy.