02 May 2022 – Daily FX Update

Overview

German data is not helping

Bonds steal the light from gold

Trading volume is low due to holidays

FOREX

U.S. Dollar

The dollar was higher in early trade in Europe on Monday, riding another wave of risk aversion as fresh economic data testified to a sharp economic slowdown in China. The dollar index was up 0.4% at 103.41, within half a percent of the 20-year high that it posted last week.

The anticipations of a 50-points rise at the Federal Reserve’s meeting drove U.S. bond yields sharply higher, making the dollar more attractive. The Fed is also expected by some to announce it will run down its bond holdings faster than previously signaled.

Euro

The Euro also traded under pressure from developments on the bond markets, with anticipations for Fed hikes deviating sharply with messaging from the European Central Bank (ECB), whose top officials still appear hesitant to commit to raising interest rates in July.

The German retail sales data for March was not helpful for the common currency, as the first month’s data to reflect the impact of the war in Ukraine on consumer confidence in the region.

Sterling Pound

In fact, the markets expect the US central bank to hike interest rates at a faster pace and ultimately lift the benchmark rates to around 3.0% by the end of the year to combat high inflation. This was reinforced by elevated U.S. Treasury bond yields, which continued to exert downward pressure on the sterling pound.

On the other hand, the British pound was undermined by signs that the U.K. economy is under stress from the soaring cost of living. Weak U.K. Retail Sales figures released last month highlighted that high inflation might have already started taking its toll on consumer spending. This forced investors to scale back expectations for any further rate hikes from the Bank of England.

Chinese Yuan

The news reflects disappointment at China’s manufacturing index, which fell to 47.4 in April, its lowest in two years, due to COVID-19 lockdowns, notably in Shanghai. The “decline in production and demand” has deepened, the authorities said in the statement.

The news pushed the dollar another 0.5% higher against the yuan to 6.6730, after a quick reserve of promises of more policy support.

Indices

U.S. Indices

U.S. stock index futures were higher in the early morning after the Nasdaq posted its worst month since 2008. Futures contracts tied to the Dow Jones futures gained 0.48%, S&P 500 futures were 0.4% higher, while Nasdaq 100 futures climbed 0.5%.

The major averages sank on Friday, accelerating April’s losses. The Dow dropped 939 points during the session, bringing its loss last week to roughly 2.5%. It was the 30-stock benchmark’s fifth-straight negative week. The Dow and S&P 500 are coming off their worst month since March 2020, when the pandemic took hold. The Dow finished April 4.9% lower, while the S&P tanked 8.8%.

European Indices

German retail sales out Monday morning showed an unexpected fall in March. The Federal Statistics Office said sales were down 0.1% for the month. The German DAX was down 0.9% in morning deals, while the French CAC was down 1.6%. The U.K.’s FTSE 100 is closed for a public holiday.

Meanwhile, global investors continue to monitor the war in Ukraine and its geopolitical implications. EU leaders are set to work on a Russian oil embargo this week. Over the weekend, the United Nations and the International Committee of the Red Cross began evacuating civilians from the besieged southern port city of Mariupol. That operation is set to continue on Monday.

Metals

Gold prices fell on Monday as elevated U.S. Treasury yields pressured demand for precious metals, ahead of a widely anticipated interest rate hike. Benchmark 10-year U.S. Treasury yields rose towards recent multi-year peaks, pressuring demand for gold.

Market participants are concerned that the Fed could be extra hawkish, pricing in a 50-basis point hike, and it could be 75 basis points in July. Spot gold retreated 0.4% to $1,888.56 per ounce, while U.S. gold futures dropped 1.3% to $1,886.90.

Spot silver fell 0.6% to $22.60 per ounce, platinum dipped 0.5% to $926.58, and palladium slid 2.2% to $2,268.48.

Crude Oil

Oil prices fell on Monday as concerns about weak economic growth in China, the world’s top oil importer, outweighed fears of potential supply stress from a potential European Union ban on Russian crude.

Prices fell after China released data on Saturday showing that factory activity in the world’s second-largest economy contracted for a second month to its lowest since February 2020 because of COVID lockdowns. Brent crude futures fell 0.6%, to $106.43 a barrel, while U.S. West Texas Intermediate (WTI) crude futures fell 0.6%, to $103.99 a barrel.