Fed Chair Powell keeps June decision open.
Fed Chair Powell reiterated that inflation is far above their objective and that price stability is the foundation of a strong economy. He also repeated that interest rates may not have to rise as far as otherwise due to the tightening bank credit conditions.
According to Powell further tightening was warranted until recently, but the Fed has come a long way and there is uncertainty over the lagged effects of policy. Powell added that the Fed has not made any decision whether rates are sufficiently restrictive while the risk of doing too much rather than too little is becoming more balanced.
Markets overall considered that Powell’s rhetoric was relatively dovish. Following the comments there was a limited shift in market expectations with the chances of a June rate hike declining to below 15% from 30% on Thursday.
ECB President Lagarde stated that the central bank was heading towards more delicate policy decisions moving forward with the bank courageous in taking the decisions needed to bring inflation down to 2%. She added that inflation is still far too high and the bank is not done yet. Following Powell’s comments the dollar edged lower with a retreat from 8-week highs and EUR/USD edging back above the 1.0800 level, although dollar sentiment was still relatively firm.
The latest CFTC data recorded a further increase in long non-commercial positions to 12,500 contracts and the largest long position since October 2021.
Markets will continue to monitor negotiations surrounding the US debt ceiling with further talks between key players on Monday.
The latest PMI data will be release on Tuesday with flash May data for The Euro-Zone, UK and US. Markets expect further contraction in the manufacturing sector and solid growth in services.
The Euro overall managed to secure a slight net recovery ahead of Powell comments on Friday. The Euro secured further relief after Powell’s comments with the Euro edging higher. EUR/USD settled around 1.0800 from highs around 1.0830 and traded close to 1.0820 on Monday.
The yen regained some ground as US yields moved lower. USD/JPY dipped to lows below 137.50 before a recovery to near 138.00. USD/JPY traded around 137.80 on Monday as the Chinese central bank held interest rates steady.
The Swiss franc regained ground as gold recovered. EUR/CHF dipped to 0.9720 with USD/CHF back below 0.9000.
Sterling overall was held in relatively tight ranges. GBP/USD rallied to 1.2480 from 1.2400 lows before settling just above 1.2450 on Monday.
Commodity currencies gained some support as the US dollar retreated. AUD/USD settled around 0.6650 with little change on Monday. USD/CAD settled close to 1.3500 from 1.3520 highs.