Strong expectations that the Federal Reserve will tighten policy aggressively over the next few months.

There are very strong expectations that the Federal Reserve will tighten policy aggressively over the next few months in order to combat inflation. Confidence in the global economy has deteriorated with expectations of a prolonged conflict in Ukraine increasing fears, especially given the impact on inflation pressures.

Chinese coronavirus developments have also increased fears over the global demand outlook while supply-side difficulties are liable increase further. In this environment, equities have declined sharply with risk-sensitive currencies vulnerable.

Confidence in the Chinese economy has deteriorated further with the threat of more extensive lockdowns given evidence that coronavirus outbreaks have spread to Beijing which will increase the threat of further lockdowns.

Chinese equities retreated sharply on Monday which maintained pressure on global risk conditions and risk-sensitive assets were subjected to further selling.

The dollar has continued to gain support in markets with the dollar index strengthening further to a 25-month high on Monday.

Higher short-term interest rates have boosted the currency on expectations of aggressive Fed tightening, with a sharp deterioration in risk appetite also triggering demand for the US currency on defensive grounds.

Exit polls for the second round of the French Presidential election reported a comfortable win for President Macron with around 58% of the vote compared with 42% for Le Pen. Final results gave Macron 58.55%, but turnout fell from 2017 and there was a high number of spoilt ballots as many voters failed to back either candidate.

The Euro-zone PMI manufacturing index retreated to a 15-month low of 55.3 from 56.5 in March, but slightly above forecasts. The services-sector index strengthened to an 8-month high of 57.7 from 55.6 and well above expectations. Inflation pressures remained intense with the second-highest rate of increase in costs and the index for selling prices increased to a record high.

The US manufacturing PMI index strengthened to a 7-month high of 59.7 for April from 58.8 previously. There was, however, a notable retreat in the services-sector index to a 3-month low of 54.7 and well below expectations of 58.0. There was further strong upward pressure on costs with output charges increasing at the fastest rate on record. Overall business confidence dipped to a 3-month low amid concerns over inflation pressures.

The UK PMI manufacturing index edged higher to 55.3 for April from 55.2 previously and above consensus forecasts of 54.0. The services-sector index, however, retreated to a three-month low of 58.3 from 62.6 and below expectations of 60.0. There was further upward pressure on costs with factory-gate prices increasing at the fastest pace on record. Overall business optimism dipped to the lowest level since October 2020.

Higher short-term yields continued to provide support for the dollar. Better than expected Euro-zone PMI data provided an element of Euro support on the crosses. Euro money-market rates also increased further on Friday.

Macron’s victory failed to provide sustained Euro support. Dollar strength also still dominated with EUR/USD sliding to 23-month lows below 1.0750.

Yield spreads and expectations of a very dovish Bank of Japan stance still undermined the Japanese currency. Risk aversion, however, provided an element of yen protection. USD/JPY settled around 128.50 on Monday.

The Swiss franc also gained some protection from weaker risk conditions. USD/CHF still posted 23-month highs around 0.9590.

Sterling was subjected to sustained selling amid fears over the UK outlook with a slide in risk appetite also undermining confidence. GBP/USD collapsed to 17-month lows below 1.2800. GBP/EUR also posted sharp losses to 3-week lows around 1.1865.

Commodity currencies came under heavy pressure amid the slide in risk appetite and stronger dollar with fears over the Chinese outlook also undermining confidence. AUD/USD slumped to 2-month lows below 0.7160. USD/CAD surged to 5-week highs above 1.2700 as oil prices also retreated.

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