The US dollar strengthens early Monday; retail sales and the FOMC’s focus of the week on Wednesday

The US dollar strengthens early Monday; retail sales and the FOMC’s focus of the week on Wednesday

The US dollar rose against its major trading partners early Monday, as markets prepared for a busy week that included the release of May retail sales Wednesday morning and the Federal Open Market Committee announcement Wednesday afternoon.

The FOMC is widely expected to raise the federal funds rate by 50 basis points at its two-day meeting this week, with a further 50 basis point increase possible at the July 26-27 meeting.

Some analysts even suggest that after last week’s stronger-than-expected consumer price report, a larger 75 basis point increase could also be on the table at this week’s meeting, but markets see that as more likely at the July meeting after more data is received.

Federal Reserve officials remain in quiet period, so there are no appearances on the schedule Monday or Tuesday other than pre-recorded comments on the Community Reinvestment Act by Fed Vice Chair Lael Brainard at 2:00 pm ET Monday.

Other data scheduled to be released this week include producer prices on Tuesday, import and export prices and the Empire State index on Wednesday, initial jobless claims and housing starts on Thursday and industrial production on Friday.

A quick summary of foreign exchange activity heading into Monday:

USD-CAD rose to 1.2854 from 1.2774 at the Friday US close and 1.2741 at the same point Friday morning prior. There are no Canadian data scheduled for release Monday after a solid May Canadian employment report was released Friday. The Bank of Canada meets next on July 13 after a 50 basis point rate increase at the June meeting, with further monetary policy tightening expected.

USD-JPY rose to 134.459 from 134.4001 at the Friday US close and 133.776 at the same point Friday morning. Japanese business sentiment declined further below the breakeven point in Q2, data released overnight showed, indicating increasing pessimism. The Bank of Japan meets Thursday and Friday and is expected to hold rates near zero while other central banks, including the Fed, accelerate monetary policy tightening.

GBP-USD fell to 1.2184 from 1.2318 at the Friday US close and 1.2440 at the same time Friday morning. UK data released earlier Monday showed a decline in Q2 gross domestic product and a drop in April industrial production, led by the manufacturing sector. The UK trade gap grew for the three months ending in April, though it narrowed for April alone. The Bank of England meets Thursday when another increase in interest rates is expected.

EUR-USD fell to 1.0459 from 1.0519 at the Friday US close and 1.0589 at the same point Friday morning. There are no EU data scheduled for release Monday. The European Central Bank said last week it expects to raise its target interest rate by 25 basis points at its July 22 meeting and will end its net bond buying program on July 1, with comments from ECB President Christine Lagarde that inflation risks are tilted toward the upside.

US Futures Set to Extend Losses Due to Inflationary Pressures

US stock futures were lower Monday, extending the previous session’s losses after annual inflation for May reached a four-decade high.

Dow Jones Industrial Average futures fell 1.9%, S&P 500 futures slumped 2.9%, and Nasdaq futures tumbled 2.9%.

Data released Friday by the Bureau of Labor Statistics showed the US Consumer Price Index soared 8.6% year-on-year in May, the highest level since December 1981, fueling fears the the Federal Reserve will act aggressively to tighten monetary policy.

Oil prices fell, with front-month global benchmarks Brent crude and West Texas Intermediate crude both down more than 1%, amid worries of fresh COVID-19 lockdowns in China following a flare-up in cases in Beijing.

There are no major economic data due for release.

Shares of Russian stocks and Russia-focused exchange-traded funds remain halted on US exchanges.

Kazimir of the ECB: We need to raise rates by 50 basis points in September.

The European Central Bank needs to speed up the pace of interest rate tightening to 50 basis points in September after an initial hike of 25 basis points in July, Slovak Governing Council member Peter Kazimir said on Monday.

“The summer is not the end of anything, just the beginning,” Kazimir said in emailed comments. “In the autumn, concretely in September, we will continue with raising rates and here I clearly see the need to accelerate the pace and deliver an increase by 0.50%,” he said.

The ECB flagged a 25 basis point interest rate hike in July and said a bigger increase may be needed in September as inflationary pressures were increasing and broadening, raising the risk that high price growth will become entrenched.

The ECB now sees inflation at 6.8% this year, more than three times its target, and price growth could hold above 2% through 2024, raising the risk that businesses and households lose trust in the bank’s commitment to price stability.

Kazimir said inflation would remain high for some time, including in double-digits in Slovakia next year.