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The US dollar fell last week after the US Federal Reserve hinted at a pause in its historic interest rate hike campaign. Global stock markets closed largely flat as US markets closed mixed in a choppy week driven by better-than-expected earnings, regional banking woes, debt-ceiling tensions and optimism that the Federal Reserve is nearing the end of its tightening cycle.
The US Dollar Index (DXY index) ended the week down 0.4%, while the MSCI All Country World Index was largely flat. Within stocks, the S&P 500 was down 0.8%, while the Nasdaq 100 was up 0.1%. Germany’s DAX 40 advanced 0.2%, Britain’s FTSE 100 fell 1.2%, respectively, and Hang Seng rose 0.8%, while Japanese markets were closed for the Golden Week holiday.
At this late stage in the first-quarter 2023 earnings season, the S&P 500 companies are posting their best performance relative to analyst expectations since the fourth quarter of 2021. Of the 85% of companies in the S&P 500 that have reported so far, 79% have reported EPS estimates. The actual is higher than the estimate. Both the number of companies reporting positive EPS surprises and the size of those earnings surprises are above their 10-year average, according to FactSet.
Data released during the week showed that manufacturing activity in China contracted unexpectedly last month, highlighting the uneven nature of the post-Covid recovery. US Manufacturing (ISM) activity improved slightly last month but remains in contraction territory. The Reserve Bank of Australia surprisingly raised interest rates by 25 basis points at its meeting on Tuesday and said it is ready for further tightening to tame inflation. The US Federal Reserve raised its benchmark interest rate by 25 basis points, in line with expectations, and signaled a pause in the tightening cycle. The European Central Bank raised interest rates by 25 basis points and maintained its optimistic message.
Next week, the minutes of the latest Bank of Japan meeting are scheduled for release on Monday. Westpac Australian Consumer Confidence Data On Tuesday; On Wednesday, US CPI and German inflation data for April are due. The Bank of England interest rate decision, the US producer price index for April, and China’s inflation figures for April are due on Thursday; UK first-quarter GDP and Chinese Yuan new loan data are due on Friday.
US inflation data will highlight how price pressures have subsided – core CPI is expected to decline to 5.5% y/y in April from 5.6% in March. Friday’s strong US jobs report trimmed expectations for a July Fed rate cut – down to 36% from a 60% chance before the data. If price pressures fail to ease as expected, this could lead to a reassessment of the 75 basis points of price cuts that were priced in by the end of the year.
The Bank of England is widely expected to raise interest rates by another 25 basis points at its meeting on Thursday after the latest wage and inflation data. With inflation still in double digits (10.1%), the BoE is likely to remain hawkish. With its US counterpart signaling a pause, the relative monetary outlook could point to further gains in GBP.
Forecasting:
USD Outlook: After Nonfarm Payrolls Explode, Will Markets Abandon Fed Cut Bets?
The US dollar fell cautiously last week as the Federal Reserve raised interest rates and Chairman Jerome Powell could not rein in bets for a summer rate cut. Eyes are on CPI and Fedspeak.
Euro fatigue heading towards an inflationary week?
It appears that the EUR/USD pair is preparing for a major technical breakout that could be catalyzed by the upcoming US and German inflation data.
British pound next week: GBP/USD tumbles, EUR/GBP tests support, BoE on the run
The Bank of England will announce its latest monetary policy decision next Thursday with a 25 basis point rate hike already fully registered. What Governor Bailey says after the decision will be key.
Australian Dollar Outlook: RBA and Fed Rise but Sentiment Swings
The Aussie finished stronger last week but mostly on the back of a struggling US dollar with strong domestic data mostly ignored amid growing concern about the direction the US is headed.
Gold Weekly Outlook: XAU/USD Retreats But Safe Haven Appeal Remains
Gold produced an exceptional week of volatility as markets shifted from major risk aversion to giving up most of their gains as US jobs data heated up.
S&P 500, Nasdaq Weekly Outlook: Banking sector stresses take center stage
US stocks struggled to erase their recent highs even as the US Federal Reserve hinted at a pause in the hiking cycle. As earnings season draws to a close, banking concerns appear to be taking center stage, posing risk to the multi-week uptrend. However, on the technical charts, there are no signs of a bullish structure reversal.
Crude Oil Weekly Outlook: Oil looks forward to further recovery as recession and demand concerns persist
Oil prices have rebounded strongly from multi-month lows as WTI closed the week above $70 a barrel. Technical indicators are hinting at a deeper recovery but market sentiment remains fragile.
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– Text of the article by Manish Gradi, Strategist for DailyFX.com
— Individual articles written by members of the DailyFX team
Connect with Jaradi and follow her on Twitter: @JaradiManish