USD remains elevated even as the economy shows signs of weakening

The U.S dollar saw a bounce on Monday after a sustained dip on the back of signs of easing inflation and the recent bank stress. Resilient retails sales, optimistic earnings in Wall Street, and hike-signalling from the Fed have caused the dollar to surge – to a one-month high against the yen and also toppling recent euro strength even on the market outlook that the ECB has a long way to go with rate hiking even as the Fed prepares to wind down. 

Prior to the emergence of bank stress, the market expected the Fed funds rate to reach nearly 5.75%. However, the May hike to 5.25% is now seen as the peak, with the market not fully appreciating the risk of further hikes after May. Compared to a week ago, even more punters have moved to a bet on a Fed fund rate of 5.25% at 2 May’s FOMC meeting; with only 19% betting on a hike pause. 

While it will be a quiet week on the macro front, Census Bureau data released on Tuesday, showed a 0.8% decrease in Housing Starts in March compared to the previous month. 

Meanwhile, Building Permits also saw a drop of 8.8% during the same period, which was significantly lower than the market forecast of a 1.45% increase. However, the February figures were revised upward from 13.8% to 15.8%, which was a positive development.

Post-Market

In a relatively quiet week on the macro front, the U.S. Beige Book, which collects anecdotal reports of key financial stakeholders and watchers from each Fed city, has become a source of direction for traders. According to Bloomberg, the Beige book indicates that the U.S. economy has stalled and credit is thin; a factor that might have contributed to the dollar index stagnating just below 102 even as the money markets are almost certain of a 25-point hike during the 2-3 May Fed meeting – up from a previously expected hike pause. 

Gold prices, which have sunk from recent highs on recent dollar strength; has found some relief after traders started assessing what might come after the 2-3 May hike (if there’s one, in an unlikely scenario). Noted hawk and St Louis Fed President James Bullard has shown a favour for an indefinite number of hike increases until inflation shows significant movement towards the Fed-preferred 2%; while Atlanta President Raphael Bostic has asked for one more hike following May – keeping rates above 5% for some time. 

Investors are now advised to keep an eye out for further clues about the U.S GDP (QoQ)  figures for Q1, which will be released 27 April at 15:30 (GMT+3), economists expect a slowdown to 2% growth, down from 2022 Q4’s 2.6% – which, if actual figures reflect accurately or does worse than expected; would indicate further slowing of the American economy. 

As a  friendly reminder, do keep an eye on market changes, control your positions, and manage your risk well.