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USD Climbs Up ahead of the FOMC Meeting

by Didimax Team

The US dollar index or it is also known as DXY posted the consecutive gains since the end of last week to reach a range of 102.25. This can be seen in a trading on Tuesday (2/May). 

The rally was supported by several recent United States economic data releases, as well as solutions to bail out troubled local banks. The market received a positive surprise from the Purchasing Managers' Index (PMI) data.

It is especially for the US manufacturing sector in May Day trading yesterday. The ISM report showed an increase in the US manufacturing PMI score from 46.3 to 47.1 in April 2023.

Or, it was superior to the consensus estimate of only 46.8. A PMI reading was 50.0 still signals contraction, but the details in the report illustrate signs of recovery in all subindexes.



US Labor Market is Tightening 

The price and employment subindex has even returned above the 50.0 threshold. That was signaling the toughness of inflationary pressures and the tightness of the labor market in U.S. manufacturing.

The US manufacturing sector contracted again. However, the Manufacturing PMI improved compared to the previous month, signaling a slower contraction.

This was said by Timothy R Fiore, a Chairman of the ISM Manufacturing Business Survey Committee. The April composite index shows that many companies continue to adjust output to demand for the first half of this year. 

Besides that, these are gearing up for growth in the late-summer/early-autumn period as well. The US dollar exchange rate immediately strengthened against all major currency pairs in the New York session yesterday. 

US Economic Data Stabilized the Market Expectations 

Its position weakened against the Antipodean currency today in light of the RBA's impromptu rate hike. However, the interesting thing is that USD still pressured the euro and sterling.

Ahead of the FOMC meeting held on May 2-3, 2023, the performance of the United States economic data stabilized market expectations for a Fed rate hike of 25 basis points. 

JP Morgan's takeover of First Republic Bank also reassures markets that the Fed tomorrow can take a rate decision without worrying about its impact on banking system instability.

Elsewhere, The Australian central bank decided to raise their rates from 3.6% to 3.85%. That made the Australian Dollar exchange rate strengthened significantly in trading on Tuesday.

AUD/USD rose by More than a Percent

The AUD/USD increased by more than one percent above the 0.6700 threshold. That was before moderating to the 0.6690s when it entered the European session. 

Before, traders and investors expected that RBA will not to change interest rates in its policy meeting this week. There is an opinion that inflation data may be slowing down soon. 

Australian inflation showed the slowest pace since late 2021. However, the RBA raised interest rates again because they thought that inflationary pressures were still too high. 

Although the latest data point to an encouraging decline in inflation, the central forecast remains that it will take several years before inflation returns to the top of the target range.

Expectation for Inflation is 4.5%

So far, the expectation for inflation is around 4.5% in 2023 and also 3% by mid-2025. It was stated by the RBA Governor Philip Lowe in a moment some days ago. 

He also added that the goods price inflation is clearly slowing due to a better balance of supply and demand following the resolution of pandemic disruptions. But services price inflation is still very high.

Besides that, the broad-based and experience abroad suggests upside risks. The RBA's announcement immediately boosted the AUD/USD rate from 0.6630 to more than 0.6690 in a matter of minutes. 

Now, market is questioning whether RBA will increase their interest rate again or not. It is especially in the next meeting that will be done next month. At the same time, there are concerns that other central banks will share similar views.



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