Daily Wrap Up 28 April 2022

28 Apr 2022 04:30 PM

Dollar roars despite poor GDP report, equities higher

The US dollar index came under a little pressure following the shock announcement the US economy contracted by 1.4% in the first quarter of this year, which was a big surprise as economists were expecting growth of 1.1%. It is worth remembering the economy expanded by 6.9% in the final quarter of last year, so it is a major deceleration. Two consecutive quarters of negative growth defines a technical recession. Keep in mind, the Russian invasion happened more than halfway through the first quarter, so if the first three months saw a negative reading, it does not bode well for the second quarter. Despite the pull back, the US dollar is still up 0.5% on the day, which speaks volumes about the strength of the currency. In light of the -1.4% growth report, the Fed might look to rein in its hawkish commentary because negative growth and higher borrowing costs is not a good combination.

Equity markets in Europe and the US are showing modest gains this afternoon as the sentiment is relatively upbeat. The poor US GDP reading took some of the wind out of the bull’s sails. Indices were much stronger this morning, but traders were encouraged to book some profit by the data. The fact the US economy shrank in first three months triggered mild concerns the largest economy in the world could be on track for a recession. This comes at a time when there are already fears that Germany could be about inter a recession. On Tuesday, European and US equites plunged to multi-weeks lows and although we have rebounded in the past two sessions, the recovery could be running out of steam.

USD/JPY traded above 130.00 and it hit its highest mark in 20 years, partially due to the dovish update from the Bank of Japan, and partially on account of the bullish move in the US dollar. The BoJ issued a strong commitment to maintain the 10-year government bond yield at 0.25%, an unlimited amount of fire power will be used to keep the yield in check. This comes at a time when the Federal Reserve are edging towards accelerating the pace at which they will tighten monetary policy, so the divergence in language from the two central banks is getting wider. Next Wednesday, the Fed will reveal its interest rate decision and dealers are basically factoring-in a hike of 0.5%.

WTI and Brent crude are up over 1% as a short while ago Germany announced it is no longer against an EU embargo on Russian oil. Traders took that as a signal that Brussels could look to target oil from Russia, which would squeeze supply. Gold is lower once again as the booming greenback is keeping it under the cosh.

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