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Market Reports 10-05-2022

Published: 10/05/2022 By ECAP

Most currency pairs traded within relatively narrow ranges during yesterday's trading, with a handful of exceptions, as a lack of major newsflow kept volatility levels relatively contained. The US dollar managed to end London trading roughly unchanged, although it did at least touch a two decade high against its major peers yesterday morning. The greenback has benefited heavily from both a deterioration in global risk sentiment and heightened bets in favour of Federal Reserve policy tightening in the past few weeks. Not only is the Fed expected to hike rates at every meeting this year, but concern surrounding an economic slowdown in China are causing investors to favour the safe-haven assets, chief among them at present is the dollar.

Macroeconomic data out of China in the past week or so has far from helped allay the aforementioned growth worries. The April PMIs of business activity sank to more than two year lows, while Monday’s trade balance data also surprised to the downside. The Chinese yuan has subsequently fallen to its weakest level on the dollar since late-2020, above the 6.70 level at the time of writing, dragging with it the likes of the Australian and New Zealand dollars - two countries heavily reliant on demand from Asia’s largest economy.

The main event risk for currencies this week may, however, be Wednesday’s US inflation print. Markets are expecting an easing in the headline measure of price growth that, if confirmed, would be the first time this has happened since August last year. We think that a surprise to the downside here could be enough to trigger a fairly marked unwinding in some of the recent bullish US dollar bets that have left the currency trading at very elevated levels.