Sterling’s minor rally during yesterday morning’s session proved to be a false dawn as a stronger dollar throughout the day pushed GBPUSD 0.7% lower on the day. Data out yesterday saw the CBI reported retail sales data for April collapse, with a reading of -35, down from March’s print of 9. The data marks the lowest retail sales print since March 2021, at which point the UK economy was still fighting the Delta outbreak, further highlighting the impact of the cost of living crisis on discretionary consumer spending. This morning, however, the pound looks to have stabilised somewhat as the US dollar is broadly sold across G10 markets. Data out this morning showed the UK housing market remained buoyant in April despite the mounting pressure on household budgets, however, there are signs that price growth is starting to moderate as the month-on-month growth in prices moderated from 1.1% to 0.3%.
The euro was hit by the double whammy of broader USD strength and concerns over the eurozone growth profile as data showed inflation pressures continue to mount on the ECB. This morning, EURUSD posts its first rally in seven trading days after touching fresh five-year lows yesterday, but the rally is largely due to a stabilisation in broader market conditions as opposed to an improvement in the region’s macroeconomic fundamentals. The gas crisis remains at the forefront after Russia’s state-owned Gazprom suspended gas supplies to Poland and Bulgaria on Wednesday due to payment in currencies other than the ruble, sending gas prices over 20% higher on the day. Since then, concerns around supply to larger EU economies have been weighing further on the euro as multiple European buyers refuse to pay in rubles, saying it contradicts with contracts and would be a way to bypass EU sanctions on the Central Bank of Russia. Data out this morning includes nationwide GDP and CPI prints from Q1 and April respectively. Released in the early hours, growth data out of France and Spain undershoot expectations in Q1. In France, the economy stalled in the first quarter, with the 0% QoQ reading falling below expectations of a 0.3% increase, while in Spain the quarterly growth figure fell 0.3 percentage points below expectations with a reading of 0.3%. Preliminary inflation data out of France, however, showed price pressures exceeded expectations with a 0.4% MoM increase, lifting the yearly figure from 4.5% to 4.8%. The inflation data compounds Germany’s reading yesterday of 7.4% YoY and thrusts stagflation fears into the limelight, highlighting how EURUSD’s price action today is somewhat disconnected from the regions underlying data. At 09:00 BST, preliminary Q1 growth data out of Germany will be released. Given expectations remain low at just 0.2% QoQ growth, any signs of a contraction in the economy may weigh on the euro’s relief rally today.
Volatility in the FX market picked up in yesterday’s session as the Bank of Japan invited further JPY depreciation by keeping policy on hold and the Peoples Bank of China permitted further CNY depreciation. The big moves in the Asian session really set the tone for the day, with the dollar advancing throughout the European session and closing out the day on a substantially stronger footing, with the DXY index touching five-year highs. The dollar’s bid occurred despite the contraction in headline real GDP for Q1 in the US. The preliminary data showed the US economy contracted by 1.4% on an annualised basis in Q1, however, the data was distorted by the rise in the PCE deflator and a 3.2% drag from net trade. Given the large distortions, market participants largely pushed the data release to one side as it is unlikely to derail the Fed from its implied hiking path. This morning, market sentiment continues to be dictated by the APAC session. Golden week in Japan has reduced liquidity in the overnight session and has likely contributed to the bounce in the Japanese yen. More importantly for global markets, however, were events in China. At the politburo meeting, China’s top leaders pledged additional support for the ailing economy as they vowed to continue the zero-Covid policy. Although tangible policy announcements were absent, the pledge to “strengthen macro adjustments” and “achieve full-year economic and social development goals” suggests that China’s growth downgrade this year won’t be as aggressive as initially believed. Chinese equities rallied after the news, with the Hang Seng up 3.2% and the CSI 300 up 2.26% at the time of writing. The improved growth outlook in China has helped take some of the growth risks off the table for regional trading peers, such as AUD which jumped 0.7% overnight with higher iron ore prices, and has stabilised risk sentiment globally. Notable underperformers this week, EUR and GBP, are posting a bounce back this morning due to the stabilisation in risk conditions, with both currencies trading half a percent higher against the dollar. Although price action in the APAC region looks to have stuck during the opening of European markets, month-end flows may distort the dollar move today once North America comes online.
The Canadian dollar rallied slightly against the US dollar on Thursday, making it the best performing G10 currency against the greenback on the day. Canadian bond yields were up 2 bps at the 2Y tenor and down 1bp at the 10Y mark, moving in tandem with the US bond market. Most European bond yields climbed much further as inflation prints from the region outstripped expectations, suggesting yesterday’s dollar surge predominantly came from risk-off flows than directly from differentials in the bond space. Oil prices were up more than 3%, which may have supported the loonie, although again, the readthrough to other petro-currencies suggests this wasn’t as clear cut. The main development yesterday was the US’s surprise decline in Q1 GDP. That largely induced volatility and market confusion as the underlying data painted a much more positive picture than the headline figure. Most of the negative impact came from the trade channel, as imports rose 17.7% YoY. Nevertheless, private final domestic demand grew quite strongly at 3.7%, suggesting the underlying growth backdrop still looks supportive for a higher interest rate environment. Today at 13:30, Canada will release its GDP data for February, while at the same time the US will publish PCE inflation figures for March.