On Monday, the dollar rose ahead of ISM manufacturing PMI for April. While China's economy is slowing sharply based on new economic data, contributing to a further surge in risk aversion. In addition, central banks' decisions on interest rates are the crucial market drivers this week as the Federal Reserve and the Bank of England are expected to raise their rates in this week's meetings.
The news reflects deep concern about China's official purchasing managers index, which dropped to 47.4 in April, its lowest level since 2020, due to COVID-19 lockdowns, especially in Shanghai.
Federal Reserve's monthly meeting
Anticipated a half-point rise in U.S. official interest rates in the following Federal Reserve's regular policy meeting on Wednesday has led to U.S. bond yields rising sharply on Friday, increasing the dollar's appeal. It is also expected that the Fed will reduce its bond holdings faster than previously indicated to combat rising inflation.
The Fed's chair, Jay Powell, hinted a week ago that the Fed could move faster and harder on rate hikes. This has led to worries that it will overtighten monetary policy when the global economy is slowing amid China's Covid outbreak.
Markets will look for signals on the prospect of further half-point rate hikes while keeping an eye on balance sheet cuts. The Fed is expected to trim $95 billion from its balance sheet each month, of which $60 billion is likely to be treasuries and $35 billion will be mortgage-backed securities.
BoE meeting on Thursday
Another central bank meeting this week includes the Bank of England, where rates are expected to rise 25 basis points to 1%. The Bank of England's meeting, a day after the Fed, is tipped to lift interest rates for the fourth time in a row, the first time it would have done that since 1997.
Andrew Bailey, chairman of the BoE, believes that the bank is treading a tightrope between curbing inflation, which is more than three times its target, and preventing a recession from happening.
The BoE needs to raise interest rates to 1% before it can start actively selling bonds it holds. Markets are curious about when these sales will begin; the range is estimated to be sometime from June to 2023.
No major central bank has started active bond sales, which would tighten monetary conditions but could hurt a fragile economy.
RBA interest rate decision
It would be surprising if the RBA raises rates this week with an election looming later this month, but a rate hike will occur next month. The central bank removed the word "highly" from its description of supportive monetary conditions and the word "patient" when it comes to reacting to changes in factors driving inflation higher. The fact that the central bank is increasingly concerned about rising prices means that we can probably expect a move very soon, especially after the quarterly CPI jumped to 2.1% from 1.3%.
In the same way as the ECB, the RBA had been adamant that no rate increase would occur this year, an unsubstantiated assertion. As the Federal Reserve may well move by 50 basis points later this week, and the Bank of England is also expected to move by 25 basis points, this week's meeting should at least allow the RBA to lay the groundwork for a subsequent move next month.
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