For the most part, risk currencies rebounded against the US dollar on Wednesday afternoon, as investors brushed aside concerns about a possible sharp slowdown in global growth in the second half of 2022.
The safe-haven dollar had begun trading on Wednesday on the front foot, with headlines in FX dominated by the resurfacing of concerns that the rising cost of living and higher global interest rates could trigger recessions later in the year.
However, these concerns didn’t last too long, and by the end of the London session most risk assets were trading higher for the day. This includes the euro, which was one of the better performing currencies globally yesterday.
There was no clear catalyst for this outperformance in the common currency, although remarks from ECB member De Guindos perhaps soothed a few concerns over the impact of fragmentation in European bond markets.
While he said that rising peripheral bond spreads were a significant worry for the central bank, he claimed that any anti-fragmentation tools should not interfere with the bank’s efforts to fight rising inflation, i.e. would unlikely derail the ECB’s plans to raise interest rates aggressively during the remainder of the year.
FOMC chair Jerome Powell began his semi-annual two-day testimony to Congress on Wednesday. He remarks didn’t really rock the boat too much, with very little, if any, new information to report, which may perhaps partly explain the retracement in the greenback.
He reiterated the bank’s commitment to bringing down inflation, and said that the US economy was well placed to handle tighter monetary policy conditions. Headlines that Powell didn’t rule out a 100 basis point interest rate hike at upcoming meetings were a bit misleading, as he merely responded to a direct question on the matter by saying that he would not take any specific size of rate hike ‘off the table’.
Powell will continue his testimony to Congress today, although we don’t expect any meaningful market moving information. We will be paying much closer attention today’s preliminary G3 PMI figures for June.
Economists are expecting a modest easing in the Euro Area and UK numbers this morning, albeit to still comfortably expansionary territory. As mentioned yesterday, we think that any surprises to the upside here would support our view that the major economic areas may prove more resilient to the increase in worldwide inflation than most of the market expects.
The US PMI numbers this afternoon will also be closely watched, with economists actually pencilling in a modest uptick in the composite index from May.
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