A Glance on USA and Europe Economy

The USD is struggling to find meaningful short-term direction with the upcoming FOMC meeting approaching, attention is drawn to recent developments. Reports of an assault on a significant dam in Ukraine may have initially led to a surge in demand for the safe-haven US dollar. However, this effect could have been counterbalanced by indications of a more aggressive stance from G10 central banks such as the RBA and ECB, as well as news suggesting that China's authorities have urged banks to lower interest rates to stimulate their economy, as reported by Bloomberg.

Since Federal Reserve speakers are currently restricted from making public statements, and there are no major US economic indicators to analyse today, the foreign exchange markets might remain relatively stagnant until there is a clearer indication of the prevailing interest rate differentials or overall market sentiment.

The EUR is a little lower after weaker-than-expected German factory orders for April continued the run of disappointing Eurozone activity data. In terms of monthly figures, orders experienced a decline of 0.4%, which was below the anticipated 2.8% increase, resulting in a 9.9% annual decrease. European Activity Surprise Index has been declining in recent weeks, following a period of improvement in late 2022 and early 2023. This suggests that there are potential risks associated with an overly optimistic view of Europe's economic recovery. The ECB's consumer inflation expectations survey revealed a significant drop, with expectations at the one-year mark decreasing from 5.0% to 4.1%. This indicates a reduced likelihood of expectations spiralling out of control.

Despite signs of softening data, ECB commentary remains somewhat EUR supportive, Klaas Knot remains steadfast in his customary hawkish stance, emphasizing the accumulation of underlying inflationary pressures and the emergence of second-round effects. While he acknowledged certain financial stability risks, his remarks largely align with ECB President Lagarde's recent tone and suggest a likelihood of forthcoming interest rate increases, potentially as early as the upcoming meeting next week. Economists anticipate three additional rate hikes by the ECB, in contrast to market expectations of only two, thereby presenting potential upward risks for the EUR.

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