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The financial markets was driven by comments by key central bankers who spoke before the ECB Forum in Portugal. Fed Chair, Jerome Powell explained that there is a risk the US central bank’s interest rate hikes will slow the economy too much.
Powell added that the bigger risk, however, is persistent inflation. Investors continue to worry that an aggressive push by the Fed to dampen inflation will drag the economy into recession and that has put a bid back into the safe haven US dollar.
Economic Data
German inflation dipped in June, the first month that the effects of government measures to dampen high fuel prices were included, data showed today.
The real Gross Domestic Product (GDP) of the United States contracted at an annual rate of 1.6% in the first quarter, the US Bureau of Economic Analysis (BEA) announced on Wednesday. This print came in slightly worse than the previous estimate and the market expectation for a decrease of 1.5%.
Other Developments
Inflation fears are being fanned further by oil prices, which extended their rise into the fourth day. The dollar index rallied to a high of 105.149 from a low of 104.356 as investors sought safety in US assets as stocks declined globally due to the mounting risk of a recession. The dollar index stayed below the two-decade high of 105.79 pinged two weeks ago.
The euro fell to 1.0435 from a high of 1.0535 with EU consumer confidence slipping further below the breakeven point in June. Markets are looking to the EU Unemployment on Thursday and inflation on Friday. These data points will be key ahead of next month’s July 21 European Central Bank’s monetary policy committee meeting when the central bank is expected to begin its tightening cycle.
GBP/USD also fell, sliding to a low of 1.2105 ahead of UK Gross Domestic Product data that will be released Thursday. The Northern Ireland protocol noise coupled with the sentiment surrounding the Bank of England are critical features in the outlook for sterling in the near term.
The BoE is expected to maintain its tightening cycle to tamp down inflation after a 25 basis point increase at the last meeting. However, it will not necessarily have to act “forcefully” to get inflation under control, according to Governor Andrew Bailey who spoke on Wednesday, adding there were signs of an economic slowdown taking hold in Britain.
USD/CAD rallied to a high of 1.2900 ahead of Canada’s GDP which will be released Thursday. traders will look ahead to next month’s July 13 interest rate decision from the Bank of Canada where the expectations are for further monetary policy tightening at after June’s 50 basis point increase.
USD/JPY was an up and down day trading between 135.76 and 137.00 and ended the day in a phase of consolidation in a key area on the hourly chart around 136.60.
