In April, the US dollar had a mixed month, gaining against most currencies but depreciating against the euro and British pound.
Thus, the US Dollar Index — a measure of the value of the greenback against a weighted basket of major currencies — clocked its second month lower, falling by 0.90 per cent in April.
Watch: Fed raises rates by a quarter of a percentage point amid banking turmoil
The Fed's policy meeting is expected to yield another 0.25 per cent increase but the thought process of future action will be closely scrutinised when the central bank holds its press conference at 10.30pm UAE time.
Before the mini US banking crisis emerged last month, markets had priced in an expectation that federal funds rates will peak at 5.75 per cent.
However, fast forward to now and markets are pricing in a top at 5.25 per cent ahead of the Fed's decision on Wednesday.
Futures markets suggest that market participants expect a more dovish Fed following this week's meeting.
According to the CME Group’s Fed watch tool, there is a 38.3 per cent probability that rates will reach 4.5 per cent by the end of the year. This compares with a 25.6 probability a month ago.
While I believe this is slightly aggressive, we will need to see how the coming US data pans out.
At present, inflation trends in the US are slightly mixed; while overall prints are showing signs of cooling, core inflation (excluding food and energy) continue to show pressures.
The US jobs market appears to be loosening — but not with enough conviction — while gross domestic product is also showing clear signs of a slowdown hitting.
Quarter-on-quarter GDP fell to 1.1 per cent in the first quarter of 2023, well below the previous reading of 2.6 per cent.
Recall that the Fed's median forecast in March was for the economy to slow to 0.4 per cent annually.
A combination of stubborn inflation, a still hot jobs market and slower growth opens the door to potential stagflation in the US, which would suggest that the Fed is not in a position to cut rates in 2023.
Therefore, we need to wait for US data before further gauging how hawkish or dovish the Fed will be — and this will start with Friday’s non-farm payrolls report.
April’s report is expected to show that new jobs came in at 182,000.
This would be the third consecutive month of a lower number of jobs added; February added 326,000 and March 236,000.
While a jobs report below the 200,000 mark will stoke risk-on sentiment (bad news is good news), also keep an eye on average hourly earnings, which is due out at the same time.
A key metric of inflationary pressures, an increase in hourly earnings could offset the lower non-farm payrolls print, as it would suggest that inflation is still on the hotter side.
Also driving volatility through the start of May is the continuation of the US earnings season.
Data from FactSet suggests that more than half of S&P 500 companies have reported earnings, with 79 per cent trumping their earnings estimates while 74 per cent reported revenue above estimates.
This has pushed the S&P 500 index above 4,100 — and close to its 2023 highs.
Some key earnings to watch out for include Advanced Micro Devices, Apple, Ford Motors, HSBC, Moderna, Pfizer and Starbucks.
Expect stronger earnings to result in risk-on sentiment flooding back into markets — but earnings calls by these respective companies could dampen the mood, so keep an eye out on how they foresee future revenue through 2023.
Finally, gold has found further consolidation within a range of $1,970 and $2,000.
I expect this range to hold, with small but sharp increases above $2,000 and below $1,970 expected to be unsustainable. Instead, the precious metal will find further consolidation in the current channel.
Gaurav Kashyap is risk manager at Equiti Securities Currencies Brokers. The views and opinions expressed in this article are those of the author and do not reflect the views of Equiti Securities Currencies Brokers