Foreign exchange trading reminder: China "takes action", the dollar is under pressure and falls, and strong salary data boosts the pound

The U.S. dollar index fell slightly in early Asian trading on April 19, Beijing time, and is currently trading around 101.72. The U.S. dollar fell against most major currencies on Tuesday after better-than-forecast Chinese economic growth data weighed on safe-haven demand for the dollar and boosted commodity currencies, while strong U.K. pay data supported the pound. China's gross domestic product (GDP) grew 4.5 percent year-on-year in the first three months of the year, the data showed, beating analysts' forecasts for a 4 percent expansion in the world's second-largest economy after the end of epidemic restrictions.

Separate data on China's March activity also showed that retail sales growth accelerated to 10.6 percent, beating expectations and hitting a nearly two-year high, while factory output growth also accelerated, but slightly below expectations.

Thierry Wizman, global FX and rates strategist at Macquarie, said in New York: "The argument that the dollar is starting to weaken a bit against major currencies from current levels is predicated on a strong performance from China. When you look at the rest of the world doing well or better than the US in terms of economic activity... that's generally not good for the dollar."

Mr. Wizman said the dollar's weakness was also driven by the possibility that inflation had slowed in the US, which was one reason the Fed would pause interest rate rises. "There is a good chance that the euro and sterling will continue to do well," he said. "It starts with the de-inflationary story in the US, which people haven't really grasped."

Futures traders priced in the possibility that the Federal Reserve will raise rates by 25 basis points at its next meeting in May, and traders still expect a rate cut by the end of the year.

Jim Caron, co-chief investment officer of Morgan Stanley Investment Management's global risk balance team, said the Fed would keep rates between 5 per cent and 5.25 per cent for the full year after the May rate rise to ensure inflation was under control. "What keeps the Fed up at night is the fear of inflation becoming unanchored" and not staying low near the Fed's 2 per cent target, said Mr. Caron. If it starts to turn back again and becomes unanchored, then that's a bigger problem. "

St. Louis Federal Reserve President Brad said the Federal Reserve should continue to raise interest rates because recent data suggest inflation remains persistent, while the broader economy appears set to continue growing, even if slowly.

Kristina Clifton, economist at the Commonwealth Bank of Australia, said: "With the Fed likely nearing the end of its tightening cycle, the dollar is likely to remain sensitive to the strength of economic data."

The dollar index has rallied more than 1% in the past two sessions and closed down 0.35% at 101.74 on Tuesday.

The euro rallied on Tuesday after losing more than 0.5 per cent against the dollar for two days, closing up 0.45 per cent at 1.0970 as expectations of a rise in interest rates from the European Central Bank became an important factor in boosting the euro.

Economists at Goldman Sachs have raised their forecasts for the ECB's end point interest rate, reflecting easing financial marekt tensions and continued strong underlying inflation. Analysts led by Jari Stehn said the ECB is expected to raise rates by 25 basis points in May, June and July, with a 50-50 chance of a 25-basis-point or 50-basis-point hike at next month's meeting.

"With stronger data, including signs that bank lending conditions are unlikely to deteriorate further, and stronger inflation data for April, a 50 basis point rate hike is very likely," they said. "The reasons why the ECB will tighten policy at a more gradual pace from now on include the possibility that recent pressures on the banking sector could have some impact on bank lending," they said. "We expect core inflation to cool in the coming months and uncertainty about the global outlook has risen."

Sterling, which closed 0.36 per cent higher at 1.2420 against the dollar on Tuesday, jumped in spite of an unexpected rise in unemployment in the three months to February as wage growth held above expectations, which could prompt the Bank of England to raise interest rates again in May.

"What has been surprising this year has been the strength of the euro and sterling, especially given the multiple crises in Europe in the second half of last year," said Mr. Wizman.

The Australian dollar closed up 0.34 per cent at 0.6722 against the dollar on Tuesday after minutes from the Reserve Bank of Australia's April meeting showed it had considered raising interest rates for the 11th consecutive month before deciding to pause.

However, the Reserve Bank of Australia said it was prepared to tighten further if inflation and demand failed to cool.

Wednesday's key data and events

Institutional Perspectives Summary

1. UniCredit Bank: The US dollar has recently rebounded or lost momentum;

① Analysts at UniCredit said in a note that the dollar had strengthened in recent days on the back of rising US short-term Treasury yields and that any gains were likely to be limited. Signs that the dollar rally might be losing steam "have already emerged", they said, suggesting investors were cautious ahead of US and European interest rate decisions in early May;

Analysts said that the euro has fallen back above $1.0950, and the euro may be boosted if the German April ZEW economic sentiment index released at 5 pm Beijing time today is strong

2. United Overseas Bank: The pound may not break below the support level of 1.2275 against the dollar.

Quek Ser Leang, market strategist at UOB Group, and Peter Chia, senior foreign exchange strategist, pointed out that the selling tendency of the pound against the dollar is expected to lose its appeal after falling to 1.2475.

② They believe that the pound will fall slightly against the dollar, but any decline is unlikely to break significantly below the main support level of 1.2275. Only a rise above 1.2475 can indicate that the downward trend has subsided

3. Analysts: The euro is supported against the dollar at the 1.08 level.

Market analyst James Skinner said the euro was pulling back after a month-long rally against the dollar, but with potential bargain buyers already lining up, the euro could also find good support as it approaches and falls below the 1.08 mark

Nomura Securities forecasts that the euro will rise to 1.14 by the end of June.

Brad Bechtel, global head of foreign exchange at Jefferies, believes that the euro can hold on to 1.0850 against the dollar.

Jordan Rochester, strategist at Nomura Securities, forecasts that the euro will reach 1.14 against the dollar by the end of June.