In early European trading on Tuesday, the U.S. dollar went up after Australia’s central bank raised rates by a lot. This made people worry about inflation even more, which drove up the yields on U.S. bonds.
At 2:50 AM ET (0650 GMT), the Dollar Index, which compares the dollar to a group of six other currencies, was up 0.2% at 102.623.
The Reserve Bank of Australia raised its key rate by 50 basis points on Tuesday morning. This was a more hawkish move than the 25 basis point increase that most people had expected. The bank also said it would do “what is necessary” to cool inflation.
AUD/USD went as high as 0.7243 before giving up most of its gains to stand at 0.7199, which is 0.1 percent higher.
The fact that Australian policymakers felt the need to raise interest rates by a big half of a percentage point has made people nervous before Friday’s U.S. consumer price data, especially after the strong U.S. jobs data at the end of last week.
Before the Fed’s policy decision next week, the May CPI report will give more information about the Fed’s plans to raise interest rates. Concerns are growing that rising prices will last longer, which could force the Fed to act more forcefully.
The last time the 10-year U.S. Treasury yield was seen, it was at 3.047 percent.This was the first time in almost four weeks that this level had been seen.
This caused USD/JPY to rise by 0.6% to 132.69, which is a new 20-year high. Yield differentials put a lot of pressure on the yen because the equivalent Japanese yields are stuck near zero.
EUR/USD dropped 0.1 percent to 1.0688 after German factory orders dropped 2.7% from March to April.This means that the Eurozone’s largest economy is likely to shrink for at least one quarter.
But the main focus is on the European Central Bank’s meeting on Thursday, which is expected to set the stage for an interest rate hike at its meeting in July.
Analysts at ING said in a note that the markets give a rate hike a close-to-zero chance, which is different from what the ECB said recently, which was that the tightening cycle would begin in July.
GBP/USD dropped by 0.5 percent to 1.2469 after U.K. Prime Minister Boris Johnson survived a vote of no-confidence but was left very weak.
Even without the political turmoil, “the pound remains vulnerable in the short term given worsening growth prospects and a possible re-pricing of BoE rate expectations,” said ING. “If cable falls below 1.2500 this week, the pair could lose as much as 1.2300-1.2350.”
