A divergent monetary policy is expected for the Federal Reserve and the ECB in the coming months, with the Frankfurt Institute likely to start cutting rates before the USA. Last week Miss Lagarde reiterated in an interview that the disinflationary process is underway, therefore leaving the doors open more than ever for a cut in the cost of money in June. On the other hand, on the American front, Powell explained that rates will remain high as long as necessary, a statement which for the markets sounds like “higher for longer”.
According to the numbers reported by the CME FedWatch Tool, regarding what the market currently prices for the cost of money in the United States, rates will remain unchanged at next week’s meeting and also in June. Some more chances of a cut in July, while to see probabilities above 50% for a cut you have to go to the meeting on September 18th. In fact, a sharp reduction in the fall in the cost of money compared to what was assumed until a few months ago, but above all the gap between rates (now equal to 1%, given that rates are at 4.50% in the Eurozone and in the 5.50% in the USA) could grow in the coming months if the ECB were to cut rates before the Federal Reserve.
This scenario justifies the strength of the dollar that has emerged in recent sessions, with the exchange rate between the euro and the greenback also slipping to the 1.06 area, before an attempted rebound.
The strength of the dollar was seen against all the main currencies, with the relationship between the pound and the American currency slipping to 1.24, but especially with the yen. Regarding the Japanese currency, it is worth opening a parenthesis, considering that since the beginning of the year it has lost over 9% against the dollar, a percentage that rises to 42% in the last 36 months. In fact, even if the era of negative rates is over, the cost of money in Japan is significantly lower than that of all other economic macro-areas. So far the Japanese Central Bank has not intervened to defend the currency and the dollar/yen ratio has recently reached the highest levels for around 35 years above 154. The scenario could change in the event of interventions by the Japanese Bank, which however no shadow was seen here.
On the raw materials front, gold remains strong, firmly above 2,350 dollars per ounce, while oil slows down slightly, even if WTI and Brent, the two reference prices for crude oil, remain in the area of 82-85 dollars per barrel.
After the recent highs above 72,000 dollars, bitcoin is taking a breather and has slipped towards 62-63,000 dollars. Expectations for long-term high rates weigh heavily, as well as some physiological profit-taking after the price run of recent months. The capitalization of bitcoin is approximately 1,250 billion, while that of the cryptocurrency sector is 2,260 billion.
Tags: dollar remains strong exchange rate euro American currency slips
