News & Analysis


As we noted in yesterday’s Morning Report, one of the key dynamics supporting the dollar over the past week was concerns that the US debt ceiling would be breached, leading to the first US government default in history. While it may seem counterintuitive that a US default would lead to defensive positioning in the dollar, we note that this has been the market’s favoured expression in the run-up to the x-date in which the Treasury could run out of funds in recent history. However, it hasn’t just been concerns over the debt ceiling default that has supported the dollar, but also data highlighting a weakening in the US consumer, which has resurrected recession concerns that would be significant to spill over to the rest of the world, and also idiosyncratic stories outside of the US that has weighed on broader risk sentiment. These include data showing weakness in the eurozone’s manufacturing sector and increased political risk in South Africa and Turkey. It is in this context that some clarity in the form of Turkey’s presidential election, an improvement in diplomatic ties between South Africa and the US, and positive tones from Congressional staff over a potential debt ceiling deal led to significant USD depreciation yesterday alongside the Japanese yen, the markets other favoured safe haven.

Today, ahead of formal talks between US Congressional leaders and the White House and updates on the US consumer in the form of US retail sales for April at 13:30 BST and earnings from Home Depot before the market open, the read across G10 currencies is less consistent. The dollar DXY index is trading relatively flat, with the Japanese yen slightly higher alongside the euro. Meanwhile, after leading gains against the greenback yesterday, the Aussie dollar is trading slightly lower alongside other commodity currencies after China’s industrial production data for April printed below expectations again, and the pound is trading on the back foot after a softer UK labour market release (more below in the GBP section). As mentioned, with key discussions on the debt ceiling set to take place today and another update on the US consumer due, this afternoon is likely to prove quite volatile for most dollar pairs.


After trading lower for two consecutive sessions, the euro bounced off of its March 30th support level to post a 0.3% gain against the dollar yesterday. In terms of news, there was little out of the continent yesterday, with most major news outlets instead concentrating on Italy’s attempts to restructure its spending commitments in order to utilise the full €200bn at its disposal from the EU recovery fund. Today, the emphasis for the EURUSD pair will likely rest on US developments seeing as the only data out of the eurozone is German and euro-area ZEW sentiment indices for May, while comments from ECB President Lagarde at 15:00 BST are unlikely to deviate from the hawkish script already delivered consistently from other Governing Council members since the last policy decision.


This morning’s big news came in the form of UK labour market data. Released at 07:00 BST, this morning’s data showed signs that the UK labour market is beginning to slow, with unemployment increasing from 3.8% to 3.9% in March. Whilst this was a modest surprise to expectations and BoE forecasts, both of which had anticipated this measure as remaining stable, the biggest shock came in the form of the change in payrolled employees. Here, despite pre-release expectations for a modest increase of 25k, the data ultimately showed a fall of 136k for the number of employees in April. Admittedly, payrolls data can be notoriously volatile, but such a large downside surprise would appear to point to a labour market definitively slowing, in line with our expectations and signs from forward-looking releases such as the REC survey on jobs. In contrast, headline wage data remained strong, with weekly earnings growth printing in line with prior readings at 5.8% on a 3m/YoY basis. But even then, our more timely measure of pay growth suggests that momentum lower remains intact, suggesting that the headline measure should cool off soon. Given this is just the first of two employment readings due before the BoE’s next meeting, all eyes will be on April’s employment report to confirm whether the initial signs that the labour market is weakening is a trend or not. With inflation set to slow rapidly as last year’s energy price spike falls out of the consumption basket, signs that the labour market is cooling are likely the last ingredient needed for the MPC to bring their hiking cycle to an end. As things stand, today’s data confirms our view that the BoE has likely hit its terminal rate of 4.5%, and markets are slowly coming around to this view. Expectations for the upcoming BoE policy meeting have seen the anticipated likelihood of a hike trimmed by 10%, and the projected peak in Bank Rate also falling by around 7bp. For FX markets, this has led sterling lower, with the pound falling around a third of a percent against both the euro and the dollar on the news, before rebounding modestly. This price action is consistent with our view that in the coming weeks, GBPEUR and GBPUSD are likely to retrace part of their recent rallies.


The loonie strengthened by 0.7% on Monday, making up Friday’s losses and then some on a day where all G10 currencies except the yen outperformed the US dollar. While the currency was supported by a broad rally in global equities and commodities. The highest impact piece of data released on the day showed New York’s manufacturing index drastically contracting, missing expectations—the month prior, it was a clear outlier and showed a strong rebound. In Canada, building permits handily beat expectations, rising to 261.6k in April from 213.9k in March. At the same time, home prices bounced by 1.6%, while sales surged by 11%. It’s looking like the bottom in housing is in. The renewed frenzy in housing activity will no doubt pose an issue to Bank of Canada officials who want to see the economy cool off. On that note, the final key piece of data ahead of the BoC’s June 7th meeting will be tomorrow’s Canada CPI release. Although the headline inflation rate has steadily fallen, over the past 3 months we’ve seen underlying price pressures clearly accelerate, bucking the trend of softer data. For this reason, we think the risks to the economist consensus of 4.2% tilt to the upside. A stronger-than-anticipated report would pose a serious risk that the Bank could resume hiking rates. Currently, the market-implied probability of June hike sits at 20%, up from 0% a month ago. Today, we also received the annual Financial System Survey, which was unfortunately conducted prior to the global banking issues that began in March, making the results minimally informative.


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