Dollar supported by rising US bond yields, euro remains resilient after ECB's hawkish turn

Euro

Despite the volatility, conditions for the euro improved slightly last week. April's PMIs were better than expected. This suggests that the eurozone economy is coping better than expected with the consequences of the war in Ukraine. Just as importantly, the ECB's rhetoric has now become distinctly hawkish. Both De Guindos and President Lagarde hinted last week that a rate hike in July is definitely being considered and expressed growing concerns about inflationary pressures. On Thursday, we will get the flash inflation data from April, which could become decisive for a rate hike in July. It's entirely possible that the headline figure will come in close to 8%, and the core index is also likely to keep rising, making it increasingly difficult to blame the spike in energy prices.

British Pound

Last week's numbers were weak across the board. This contributed to the pound falling below the 1.30 level against the dollar. Retail sales, consumer confidence and economic activity PMI indicators were all weaker than expected. The Bank of England's confused communication about the inflation wave also hurt the pound. However, we note that the PMIs still point to strong growth and that the economy has reached (almost) full employment. We therefore consider the pound's downward movement last week to be a greatly overreaction and there is no major macroeconomic news on the agenda this week. The Bank of England has entered its 'blackout' period (a period in which there is no communication in the run-up to the next meeting), so trading in the pound will mainly react to events elsewhere.

U.S. Dollar

A 50 basis point rate hike is now more or less priced in, not only for the next Federal Reserve meeting, but also for the two meetings after that. Now, some Fed representatives are even toying with the idea of delivering a 75 basis point hike. We've been saying for more than a year that markets haven't priced in enough of the Federal Reserve's interest rate hikes, but it's slowly becoming enough for the short term. U.S. bond yields can now only rise further at the long end of the yield curve. The short-term interest rate differential between the US and the eurozone appears to be stabilising for the time being. This may soon slow the dollar's rally against the European currency.