Christine Lagarde's comments supported EUR/USD after she stated there was likely to be a 50 bps rise in interest rates at the next meeting, due to high inflation. GBP/USD may see a similar scenario.
Yesterday, the US Purchasing Managers' Index (PMI) figures for February were released, indicating that business activity has stabilized after seven months of decline. Despite increasing interest rates and decreasing purchasing power, businesses seem to have a better outlook, as inflation seems to have peaked, and the risk of a recession has receded.
Additionally, the latest data indicates an improvement in the supply chain's bottlenecks, with factory input delivery times improving at a rate that hasn't been seen since 2009. However, the rebound is mainly driven by the services sector, which is partly due to warm weather. While manufacturing PMI data shows signs of improvement, the manufacturing sector is still contracting and focusing on reducing its inventory.
Furthermore, the recent improvement in the supply situation has eased the pressure on manufacturing supply chains, but it highlights that the driving force of inflation is now shifting towards wages in the midst of a tight labor market. The potential for an inflationary spiral of wages may prompt the Fed to raise interest rates for an extended period, which could act as a headwind for economic growth.
Related: What is inflation and how does it impact investing?
Yesterday's release of economic data caused a rise in treasury yields, with the 10-year bond surpassing 3.90%. As a result, Wall St. indices fell more than 1%.
Contributing to the declines were the earnings report from retail giant Walmart, which was below analysts' expectations, as well as the company's pessimistic outlook for 2023. During the session, Walmart shares fell 2%, but they later recovered all of the lost ground.
Despite the increase in market interest rates, the performance of the US dollar was mixed. It strengthened against the Japanese yen and Australian dollar, but remained stable against the euro and weakened against the British pound.
Yesterday, remarks made by Christine Lagarde provided support for the EUR/USD pair as she stated that there will be a 50-basis point rise at the next meeting, although the market still speculates the possibility of a 75-basis point increase. The high inflation figures in Europe justify the movements in interest rates.
A similar scenario could occur for the Bank of England, with GBP/USD rallying over 100 pips yesterday and rebounding from the 100-day exponential moving average technical level.
Related: EUR/USD analysis and price predictions
Sources: Bloomberg, Reuters