Dollar retreated from its recent high following expectations that the Fed could pause its tightening cycle after hikes of 50 basis points in June and July. With the May’s Nonfarm payroll around the corner, solid jobs data in the US should provide a boost for the Dollar, alongside prospects of higher interest rates and safe-haven flow amid the risk aversion. Across the Atlantic, Euro and Pound halted four consecutive months of decline against the greenback. ECB took on a more hawkish stance with ECB President Christine Lagarde stating that the central bank will likely exit negative interest rates by the end of the third quarter. Growth outlook in the Eurozone remained resilient against recession, supported by strength in the service sector while cost pressures eased for the second month but stayed elevated. In the UK, Chancellor Rishi Sunak announced a Cost of Living Support package to boost consumer spending and alleviate mounting price pressures and living costs. Rising prices for electricity, gas, and other fuels pushed annual inflation in the UK to 9% in April, the highest level since 1982. However, chances of another BoE hike are dwindling due to growth uncertainties.
On the commodity currencies front, robust April retail sales data from Australia showed that consumers held up well in the face of rising inflation, paving the way for more interest rate hikes. Markets expect the RBA to hike rates in June, citing the economy’s resilience to high inflation and global headwinds. Reports that Shanghai will allow more firms in zero-Covid regions to resume normal operations from the beginning of June also buoyed demand for the risk-sensitive currency, as the country is poised to benefit from a resurgence in consumer demand, especially with China being one of Australia’s largest trading partners. Meanwhile, anticipation for the Bank of Canada to continue its tightening cycle by lifting its benchmark rate by 50 basis points, the third consecutive boost in borrowing costs could buoy demand for the Loonie. Governor Macklem of the Bank of Canada earlier stated that the central bank is ready to raise interest rates “forcefully if needed” to rein in inflation. In New Zealand, RBNZ raised the Official Cash Rate by 50 basis points to 2%, in line with market expectations, but said that a larger and earlier hike reduces the risk of inflation becoming persistent and projected the cash rate to peak at 3.95% in the third quarter of 2023, ahead of its February forecast for a peak of 3.35% in 2024.
Elsewhere, crude oil soared to $118 per barrel, buoyed by fears over a tighter global supply after EU leaders agreed to ban 90% of Russia petroleum by the end of 2022. This alongside a projected increase in demand as China emerges from its lockdown could support a further oil price rally. Meanwhile, OPEC+ is widely expected to stick to last year’s oil production deal, lifting July output targets by 432,000 barrels per day.