On May 28, local time Wednesday, European Central Bank Vice President Luis de Guindos stated that despite global stock markets repeatedly hitting new record highs, the risk of a market correction is "increasing" due to a combination of factors including geopolitical turmoil, fiscal challenges, and elevated valuations. "There is a risk of a market correction because current market valuations are already quite high, quite expensive... From our perspective, the most concerning core factor is geopolitical risk." He added, "Beyond that, we also face the issue of fiscal conditions in Europe, and problems within non-bank financial institutions, primarily including private credit and private equity firms, as well as the linkages between these non-bank institutions and the banking system. Therefore, this is an accumulation of multiple risk factors." European Central Bank Governing Council member and Governor of the Bank of France, François Villeroy de Galhau, said on Tuesday that European policymakers "will take all necessary measures" to ensure inflation returns to target levels. He stated, "Speaking on behalf of the ECB, this means we will take all necessary measures to bring inflation back to the 2% target in the medium term. The markets can be assured of this."
Additionally, influenced by falling oil prices and easing inflation expectations, traders have reduced their bets on the extent of Bank of England interest rate hikes this year. Money markets are pricing in a cumulative 36 basis points of rate hikes by the Bank of England by year-end, the lowest level in over a month; according to swap contracts linked to policy meeting dates, this is equivalent to one 25-basis-point hike, with the probability of a subsequent hike being less than 50%. The UK two-year government bond yield, which is sensitive to monetary policy changes, fell by 8 basis points at one point to 4.22%, hitting a one-month low. The UK is highly dependent on imported energy and is vulnerable to economic shocks caused by war; therefore, traders anticipate that a swift end to the conflict would further alleviate inflationary pressures.
Data to watch today includes the Eurozone May Economic Sentiment Indicator, the Eurozone May Consumer Confidence Index final reading, the US April Personal Spending Month-over-Month rate, the US Q1 Real GDP Annualized Quarter-over-Quarter revised figure, the US April Durable Goods Orders Month-over-Month preliminary reading, the US Initial Jobless Claims for the week ending May 18, and the US April Seasonally Adjusted Annual Rate of New Home Sales. Furthermore, the European Central Bank will release the minutes of its April monetary policy meeting in the evening, which requires close attention.
US Dollar Index The US Dollar Index consolidated with slight fluctuations yesterday, closing modestly higher on the daily chart, with the current exchange rate trading around 99.30. In addition to the sustained support from rising expectations of a Federal Reserve rate hike, the cooling expectations of a swift end to the Middle East conflict, which maintains some safe-haven demand for the dollar, also provided support for the index. Moreover, the recent overall positive US economic data continues to underpin the index. Today, focus is on resistance around 99.80, with support around 98.80.
Euro/US Dollar The Euro consolidated with slight fluctuations yesterday, closing modestly lower on the daily chart, with the current exchange rate trading around 1.1620. The primary factor weighing on the Euro was the continued strength of the US Dollar Index, supported by rising Fed rate hike expectations and safe-haven demand. However, hawkish remarks from ECB officials, which heightened expectations for a June ECB rate hike, limited the pair's downside. Today, focus is on resistance around 1.1700, with support around 1.1550.
Pound Sterling/US Dollar The Pound Sterling moved lower with fluctuations yesterday, closing modestly lower on the daily chart, with the current exchange rate trading around 1.3410. In addition to pressure from the stronger US Dollar Index, supported by multiple favorable factors including rising Fed rate hike expectations, falling oil prices easing inflation expectations, cooling Bank of England rate hike expectations, and declining UK government bond yields also weighed on the pair. Today, focus is on resistance around 1.3500, with support around 1.3300.
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