Forex Trading Alert: Expectations of Fed Rate Hike Boost US Dollar Rebound, While Bleak UK Economic

In the early morning of April 10th, Malaysia time, the US dollar index slightly rose and is currently trading near 102.14. The US dollar strengthened last Friday as data showed job growth in the world's largest economy increased last month, suggesting that the Federal Reserve may have to raise interest rates next month.

Before the jobs report was released, the interest rate futures market had been betting that the Federal Reserve would pause its rate hikes at its policy meeting in May. Now, the market has set the probability of a 25-basis point rate hike by the Federal Reserve at 70%, even though the possibility of multiple rate cuts before the end of the year has already been priced in.

The data released on last Friday showed that the US non-farm payrolls increased by 236,000 in March, which was roughly in line with the forecast of 239,000. February's data was revised higher, showing an addition of 326,000 jobs rather than the previously reported 311,000. The unemployment rate dropped to 3.5% from February's 3.6%. After rising 0.2% in February, average hourly earnings, which reflect wage inflation, increased by 0.3% in March.

Karl Schamotta, Chief Market Strategist at Corpay, said, “Fed officials are likely to continue to convey their message of higher rates for longer ahead of the May policy meeting, supporting expectations for one last rate hike and providing support for the US dollar.” He added, “However, recent data suggests that the economic risk environment is becoming more negative - if inflation and retail sales data disappoint in the coming weeks, all bets will be off.”

Ahead of the Easter weekend, there was thin liquidity hours after the release of the employment figures. Some European markets will also be closed on Monday.

Analysts also noted that while the jobs report showed strong job growth, there were some areas of mild decline, particularly in manufacturing and construction. Charlie Ripley, Senior Investment Strategist at Allianz Investment Management, said in an email, “(This) should be an encouraging signal for the Fed as some of the effects of monetary policy are starting to take hold.”

Following the release of the nonfarm payrolls data, investors are now focused on the U.S. Consumer Price Index (CPI) for March. Economists surveyed expect the core CPI to rise 0.4% month-on-month and 5.6% year-on-year for last month.

The euro fell 0.2% against the dollar last Friday to 1.0896. Expectations of a rate hike by the European Central Bank helped limit the euro's decline.

Morgan Stanley raised its 2023 economic growth forecast for the Eurozone by 20 basis points to 0.8% on Friday, while also stating that the region may see stronger GDP data in the first half of 2023, but it will decline afterwards due to restrictive monetary policy and negative impact from weaker-than-expected US economic prospects.

Morgan Stanley expects the European Central Bank to raise interest rates three times this year to tackle inflation, while ECB board member Holzmann stated on April 3 that it would be difficult to reverse the slow-down of the ECB's rate hikes to 25 basis points, and it could still raise rates by 50 basis points in May.

The pound fell 0.22% against the US dollar on Friday, marking its third consecutive day of decline, and closing at 1.2411. On April 4, the Chief Economist of the Bank of England, Huw Pill, stated that the bank needs to complete the task of eliminating high inflation, hinting at further interest rate hikes in May. However, Pill also acknowledged that the Monetary Policy Committee faces difficult decisions, especially amid fragile financial markets.

Despite improving macroeconomic expectations for the UK economy, factors such as sustained high inflation, inadequate investment, and declining overseas market demand have limited investors' optimism for UK economic growth, which will restrict further significant gains in the pound-to-dollar exchange rate.

According to British media reports, Nomura Securities predicts that the GBP/USD exchange rate may reach 1.30 in 2023, but this is closely related to the Bank of England's future monetary policy measures and the trend of UK economic growth.

The US dollar slightly rose against the Japanese yen, reaching a new four-day high of 132.64 on Monday, supported by a stronger US dollar. Last Friday, the USD/JPY rose by 0.24%.

Key data and events on Monday

Summary of Institutional Views

1. Bank of America: The March nonfarm payrolls may prompt the Federal Reserve to raise interest rates in May, followed by a pause in rate hikes.

• Bank of America believes that the March employment report may prompt the Federal Reserve to raise interest rates by 25 basis points in May, followed by a pause in rate hikes. The labor market is showing signs of cooling, but remains very tight.

• Bank of America still expects the Federal Reserve to keep rates unchanged after the May meeting, which means the eventual rate will be between 5.0% and 5.25%. The continuous slowdown in economic data since January implies significant risk of negative growth in this quarter and weakness in the second quarter. By the June meeting, the Fed will have received a lot of data on the second quarter, which should prove that pausing rate hikes is reasonable.

2. Hedge fund: Fed policy shift imminent, dollar may depreciate by 15% within a year and a half.

• Eurizon SLJ Capital, a UK-based hedge fund, released a report stating that with cooling inflation, the Fed is poised to loosen monetary policy, and the dollar could fall another 10% to 15% over the next year and a half.

• The company's CEO, Stephen Jen, recently stated that the Fed may be very close to or may have already passed its hawkish peak, meaning that rate cuts are imminent.

3. Morgan Stanley: Eurozone faces two major obstacles, inflation shock and monetary policy shock;

• Morgan Stanley stated that the Eurozone faces two major obstacles, inflation shock and monetary policy shock;

• The stronger-than-expected soft data before March indicates that we are facing a wave of shocks, and although the overall inflation shock is subsiding, the monetary policy shock has not yet begun to have a strong impact on the Eurozone economy.

4. Capital Economics: The European Central Bank has further room for interest rate hikes in the coming months;

• Franziska Palmas, senior European economist at Capital Economics, believes that the PMI data for March in the Eurozone paints a picture of an economy with resilience, meaning that economic growth in the first quarter of the Eurozone is almost certain;

• In addition, strong employment conditions, ongoing inflation pressures, and other factors provide further room for interest rate hikes by the European Central Bank in the coming months.