05 May 2022 – Daily FX Update

Overview

USDX drops after Fed rate hike

Sterling pound waits for BOE decision

Gold shines to hedge after Fed rate

FOREX

Dollar Index (USDX)

The Federal Reserve (Fed) on Wednesday raised its benchmark overnight interest rate by half a percentage point, the biggest jump in 22 years, and the U.S. central bank’s chief appealed to Americans struggling with high inflation to be patient while officials take the hard measures to bring it under control.

The Fed set its target federal funds rate to a range between 0.75% and 1% in a unanimous decision, and Fed Chair Jerome Powell said policymakers were ready to approve half-percentage-point rate hikes at upcoming policy meetings in June and July.

The Fed also said it would start next month to reduce the roughly $9 trillion stash of assets accumulated during its efforts to fight the economic impact of the coronavirus pandemic as another lever to bring inflation under control.

The dollar fell against Asian currencies in its sharpest fall in more than a month against majors after the U.S. Federal Reserve raised interest rates but buried the notion of larger rises could lie ahead. The dollar index toppled from near a two-decade high and fell 0.9% to 102.450 in the wake of the Fed decision.

Euro (EURUSD)

In the last inflation outlook, the European Central Bank’s officials appeared to give up the fight against the first-rate hike in a decade, acknowledging that neither negative interest rates nor quantitative easing are appropriate right now.

The comments weren’t enough to stop the euro from correcting a little after it jumped against the dollar on Wednesday in response to the Federal Reserve’s actions and comments. EURUSD was down 0.2%, at $1.0600, and steadied at $1.0613 during the Asian trades.

Sterling pound (GBPUSD)

he UK central bank looks ready to raise interest rates for the fourth time since December to the highest level in 13-years to contain inflation, which has leaped to a 30-year high. Given that the MPC voted 8-1 in favour of the 25 bps rise in March, any sign of widening dissents to keep the interest rate unchanged would be seen as a dovish tilt.

Heading into the key event risk, the release of the final UK Services PMI might do little to impress traders or provide any meaningful impetus to the Sterling pound. Sterling rose more than 1% to $1.2637 on Wednesday but it was under pressure at $1.2548 during the Asian session.

Australian Dollar (AUDUSD)

he Aussie dollar’s 2.2% leap was its largest since late 2011 and followed a surprisingly hawkish turn from the Reserve Bank of Australia, which began its cycle of interest rate rises with a larger-than-expected 25 bp hike on Tuesday. The Aussie was last at $0.7233, edging a little lower from its overnight peak of $0.7265.

Indices

U.S. Indices

U.S. stocks closed higher on Wednesday after the Federal Reserve (Fed) delivered an expected rate hike. Meanwhile, the S&P 500 recorded its biggest one-day percentage gain in nearly two years advancing of almost 3% was the strongest since May 18, 2020.

The U.S. central bank set its target federal funds rate to a range between 0.75% and 1%, with further rises in borrowing costs of a perhaps similar magnitude likely to follow.

The Dow Jones Industrial Average rose 2.81%, to 34,061.06, the S&P 500 gained 2.99%, to 4,300.17 and the Nasdaq Composite added 3.19%, to 12,964.86.

European Indices

European stock markets opened higher this morning, following the strong gains on Wall Street after the Federal Reserve raised interest rates by 50 basis points. The DAX futures contract traded 0.4% higher, CAC 40 futures climbed 2.3%, and the FTSE 100 futures contract rose 1.1%.

The attention turns to the Bank of England today, which is expected to raise its benchmark rate by 25 basis points, its fourth consecutive hike to try and curb soaring consumer prices.

Asian Indices

Asian shares tracked Wall Street gains after the U.S. central bank raised interest rates by 50 basis points but sounded a less hawkish tone than feared, lifting investor sentiment and sending the dollar lower. China’s shares defied the broader rally with rising COVID-19 cases and a strict lockdown in the financial hub of Shanghai weighing on sentiment.

Hong Kong’s benchmark Hang Seng Index rose 0.77% in early trading, with the tech sector index adding 1.43%. While Australia’s S&P/ASX 200 also performed strongly with a 0.61% increase.

Metals

Gold was up on Thursday morning in Asia, after the U.S. Federal Reserve hiked interest rates in its latest effort to curb inflation. The Fed emphasized inflation as a risk to the economy while also ruling out larger hikes for the rest of 2022.

Gold futures jumped 1.76% to $1,901.67, after rising 1% earlier in the session, while, the dollar inched up, but remained near the one-month low hit during the previous session. Additionally, silver jumped 1.1%, platinum firmed 0.6% to $997.19, and palladium rose 0.8%.

Crude oil

Crude Oil prices were up this morning, stretching gains from the previous session after the European Union (EU) unveiled new sanctions against Russia. The suggestion by European Commission President includes phasing out supplies of Russian crude in six months and refined products by the end of 2022.

OPEC+ will meet later in the day, and it is expected to agree to raise production targets by 432,000 bpd for June 2022. Furthermore, Brent oil futures were up 0.35% to $110.53 and WTI futures edged up 0.20% to $108.03.

Meanwhile, U.S. crude oil supply data showed a build of 1.302 million barrels in the week to April 29. Which is more than the forecast of 850,000, while a 692,000-barrel build was reported during the previous week. Crude oil supply data from the American Petroleum Institute released the day before, showed a draw of 3.479 million barrels.