Despite the yen's strengthening, the DXY dollar index rose sharply between the end of the Asian and early European trading sessions (the yen's share of the DXY is approximately 13.6%). The dollar strengthened dramatically against the euro, pound, and Canadian dollar with their shares of the DXY roughly 57.6%, 11.9%, and 9.1% respectively. It was the reason why the dollar index rose to its new high of 104.54 since January 2003. As of the publication of this article, DXY dollar index futures are trading near the 104.52 mark.
Taking into account the dollar's obvious advantage in the foreign exchange market and the decline in global stock markets, a further rise in the DXY is likely. Exactly 20 years ago, DXY dollar index futures were trading near 110.0. Moreover, there are currently no significant fundamental factors to slow the dollar's strengthening and the DXY's rise toward that level.
The US Bureau of Labor Statistics reported yesterday that the Consumer Price Index (CPI) rose by 0.3% in April (8.3% year-on-year), exceeding expectations of growth by 0.2% and 8.1% respectively. Although higher than expected, the rise slowed from 1.2% and 8.5% respectively in March.
The core CPI rose by 0.6% (6.2% year-on-year) exceeding the forecast. However, it was below March's readings.
The slowdown in annual inflation in April was the first easing of price pressures since August 2021. The data show that the Fed's more aggressive policy turned out to be effective. Nevertheless, inflation is still rising, albeit at a slower pace. Inflation remains near 40-year highs which will force the Fed to continue to pursue its more aggressive policy.
Notably, the Fed raised interest rates by 0.50% last week, its largest increase since 2000. Moreover, the Federal Reserve approved a plan to shrink its $9 trillion asset portfolio to curb inflation.
Uncertainty for investors is exacerbated by the military conflict in Ukraine, which has further fueled inflation by boosting commodity prices as well as coronavirus restrictions in China that threaten to undermine the global economy.
In the review for May 9, 2022, it was suggested that "the S&P500 and the US stock market will remain under pressure," and "if the US stock market continues to decline, the S&P500 will likely to touch the levels of 3950.0, 3860.0 soon." Yesterday, the S&P500 index ended near the 3935.0 mark during the trading. Besides, today stock indices will obviously decline at the start of the American trading session. As of the time of publishing this article, the S&P500 futures are trading near 3910.0. It was assumed that "a decline below 3640.0 could break the bullish trend of the S&P500". Currently, this scenario is realistic.
As mentioned above, the US dollar continues to dominate the foreign exchange market, in particular it keeps rising in the GBP/USD pair. Today, negative UK data was released exeting additional pressure on the pound. Moreover, the US National Statistics Office reported Q1 GDP growth of 0.8% compared to the growth forecast of 1.0% and the previous value of 1.3%. GDP was down 0.1% in March signaling weakening momentum at the end of Q1.
The British pound fell to its lowest level in two years against the US dollar and hit a 7-month low against the euro after the release of UK GDP data. The data suggests that despite increased inflationary pressures, the Bank of England, unlike the Fed, will have limited prospects of further raising interest rates.
According to economists, continuing supply chain problems, labor shortages, tightening of fiscal and monetary policies, and strained trade relations with the EU pose additional threats to the economy.
The growth prospects for the UK economy are deteriorating. Therefore, economists currently believe the Bank of England will raise interest rates twice this year rather than five times as the markets expect.
At the time of publication of this article, the GBP/USD pair is trading near 1.2207, having slightly corrected and rising from today's low of 1.2165. Nevertheless, strong negative momentum prevails, predetermining further GBP/USD decline (for more details see "GBP/USD: Technical analysis and trading recommendations for May 12,2022").
