Home Daily Commentaries USD climbs as oil prices drop sharply

USD climbs as oil prices drop sharply

Daily Currency Update

The US dollar bounced back this morning while investors become increasingly cautious and look to lower their exposure to potential losses as aggressive monetary tightening by a series of central banks prompted widespread risk aversion. U.S. stock index futures were weaker across the board this morning as oil slipped on worries that higher borrowing costs could trigger a recession and reduce the demand for fuel. In his testimony before Congress yesterday, Federal Reserve Chair Jerome Powell reiterated his opinion that US interest rates could rise at least two more times this year to combat high inflation. The Fed made it clear that it is closely watching economic data to help guide its decision. The release of Purchasing Manager’s Index (PMI) data will offer a fresh look into the health of the country’s economy.

Key Movers

The EUR fell around 0.3% to 1.0930, ahead of the release of the region’s PMI surveys. A softening in activity is largely expected, but solid PMI numbers may also bolster the euro as they would suggest higher rates ahead in a region which fell into recession in the first quarter of the year.

Central banks remain focused on taming inflation, with growth considerations coming in as an afterthought at this point. Overnight, the Bank of England (BoE) surprised markets by hiking interest rates 50 basis points (bps). Stronger wage and inflation data and the significant concern of a wage-price spiral brought the borrowing rate up to 5%, its highest level since early 2008. This was the 13th consecutive meeting that the BoE have raised rates and indicators show, there will be more to come. According to the BoE if there is more evidence of “persistent pressures, further tightening in monetary policy would be required.” Markets are anticipating interest rates to hit 6% by the end of 2023.

The BoE was not the only bank to hike rates. Norway’s Norges Bank also surprised markets with a 50 bps hike and flagged more tightening with similar inflation worries as the driver. Likewise, the Swiss National Bank raised rates by 25 bps.

Elsewhere, the risk-sensitive AUD fell 0.9% to 0.6694, while JPY climbed 0.2% to 143.37. Core Consumer Price Index (CPI) data in Japan jumped to a 42-year high during the month of May, indicating that underlying Japanese inflation remained hot.

Expected Ranges

  • EUR/USD: 1.0848 - 1.0983 ▲
  • GBP/USD: 1.2696 - 1.2757 ▲
  • AUD/USD: 0.6665 - 0.677 ▲
  • USD/CAD: 1.3145 - 1.3221 ▲