The USD increased significantly on Wednesday and reached a fresh peak in over two months. The greenback is set for an overall 3% gain for the month of May, due to positive US economic data that suggests the Federal Reserve may tighten policy in June and maintain higher interest rates for a longer period.
The economic data from China was disappointing, which caused concerns that the expected recovery of the economy may not happen as quickly as hoped.
In May, China’s factory activity experienced a more significant contraction than anticipated due to decreasing demand. This puts pressure on policymakers to strengthen the country’s inconsistent economic recovery. According to data from the National Bureau of Statistics (NBS), the official manufacturing purchasing managers’ index (PMI) dropped to 48.8 in May from 49.2 in April. This is its lowest reading in five months and below the 50 mark. The reading also went against expectations for an increase to 49.5.
Meanwhile, services PMI dropped to 54.5 in May from 56.4 in April, indicating a slower expansion in non-manufacturing activity.
The economic indicators for April, including PMIs, suggest that the economic rebound is slowing down. China’s economy is bouncing back after three years of pandemic lockdowns, the factory, property, and export-focused sectors are still struggling, while the service industry is doing better.
Both the Australian dollar and the New Zealand dollar were greatly affected by the data from their main trading partner, China.
Weak data from China data coupled with U.S. rate expectations put more pressures on the Aussie. The AUD/USD dropped below $0.65, remaining at its lowest levels in more than six months. The Australian dollar is set to drop by approximately 2% in May, marking its fourth consecutive monthly decline.
The CPI indicator in Australia increased in April, suggesting that inflation will continue to be high and put pressure on the RBA which hiked rates unexpectedly this month to address high inflation. Inflation has unexpectedly gone up by 0.5% from the previous month and annual inflation picked up to 6.8%.
The Governor of the Reserve Bank of Australia, Philip Lowe, expressed willingness to take all necessary measures to bring inflation back to target and has warned that although inflation expectations are decreasing, there are still concerns that inflation may rise.
Since the Reserve Bank of New Zealand indicated last week that rate hikes are coming to an end following a total of 525 basis point increases since October 2021, the Kiwi dollar has underperformed and the NZD/USD is down by nearly 2.6% in May.
Elsewhere, the euro has continued to decline and has reached its lowest level since March 17 due to European inflation decreasing faster than anticipated. According to recent data, inflation rates in France and major states in Germany are decreasing rapidly. This has led analysts to believe that the European Central Bank may not continue to raise interest rates and may create further pressures on the euro against the USD.
USD Steady at 2-months High ahead of Debt Ceiling Vote
The US Dollar Index (DXY) gained 0.3% on Wednesday, hovering near its highest levels since March at mid 104s, buoyed by stronger-than-expected economic data and growing expectations for more U.S. rate hikes.
The likelihood of the Fed implementing a 25 basis point rate hike in June has increased based on current market pricing. This is different than previous expectations that there would be a pause in the tightening cycle.
Loretta Mester, the President of Cleveland Fed, stated on Wednesday that there is no convincing reason for the Federal Reserve to halt its cycle of increasing interest rates in its upcoming meeting.
The dollar received a boost this week as President Biden and House Speaker McCarthy reached a preliminary agreement on the debt ceiling over the weekend and expressed optimism that the deal would receive bipartisan support.
As the deadline for a damaging default approaches, the U.S. House of Representatives may vote on a bill to raise the $31.4 trillion debt ceiling today.
The bipartisan deal requires support from both Republicans and Democrats for it to pass, despite the Republicans’ narrow 222-213 majority in the House. Some members from both parties have expressed disagreement with certain sections of the bill.
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