Weakness in US Dollar Index, Attention on This Week's Meetings of US and European Central Banks

Last week (6/5-6/9), the US dollar index fell 0.4%, with most non-US currencies rising, and the Australian dollar performing the best with a 1.9% increase.

【Source: MacroMicro   Date2023/6/5-2023/6/9】

【Source: MacroMicro   Date2023/1/1-2023/6/9】

Last week, the U.S. dollar index fell by 0.4%, marking its second consecutive weekly decline, mainly due to divergent expectations in monetary policy.

The unexpected rate hikes by the Canadian and Australian central banks caused the market to reprice the interest rate expectations for both countries. Meanwhile, the Federal Reserve may keep rates unchanged at this week's meeting, creating a divergence that weakens the overall strength of the US dollar.

In addition, weaker-than-expected US economic data has also weighed on the dollar to some extent. The May ISM services index unexpectedly fell to 50.3, hitting a new low for the year, with declining business activity and orders, as well as a near three-year low in the prices paid index. This indicates that the US economy still faces certain risks of recession.

【Source: MacroMicro】

Mitrade Analyst：

Pay attention to this week's FOMC meeting. Currently, the market has no expectations of a rate hike from the meeting, but believes that the Fed will convey more hawkish information in its statement and dot plot. If the Fed unexpectedly raises interest rates or significantly increases terminal rates, the US dollar may strengthen in the short term.

Last week, the euro rose 0.4% against the US dollar, mainly supported by weak US economic data and market expectations for the European Central Bank (ECB) to raise interest rates.

Currently, the OIS market expects the ECB to complete its current rate hike cycle before September, with a total increase of 50 basis points expected by the end of this year. The interest rate expectation gap between the ECB and the Federal Reserve will continue to support the euro in the second half of the year.

However, we should also note some negative factors. First, economic data in the Eurozone continues to decline. Last week's data showed that Germany's April manufacturing orders unexpectedly fell by 0.4% from the previous month. Second, consumer inflation expectations in the Eurozone have significantly declined. The ECB's survey in April showed that consumers' inflation expectations for the next 12 months dropped from 5% in March to 4.1%. These negative factors will strengthen market expectations for the end of the ECB's current rate hike cycle.

【Source: MacroMicro】

The European Central Bank will hold a monetary policy meeting this week. The market has fully priced in a 25 basis point interest rate hike, and investors should pay attention to the language in the meeting statement to see if any clues are provided about when this round of rate hikes may end.

Mitrade Analyst：

If the European Central Bank raises interest rates by 25 basis points this week without indicating a more hawkish monetary policy stance, while the Federal Reserve suggests that it may continue to raise interest rates in the future, then the euro may face some downward pressure.