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GBP
Whilst markets will have to wait until Wednesday for this week’s big piece of UK specific news, coming in the form of April inflation data, this morning brought an update on the state of the UK housing market. Rightmove data showed a decline in the YoY increase in asking prices from 1.7% last month to 1.5% in the latest release. But it was month-on-month figures that really caught the eye, moving up from just 0.2% in April to show a 1.8% increase in asking prices this month. This is a surprising level of robustness, especially in the context of Bank Rate that has been hiked sharply in the past 12 months and now lies at 4.50%. But with mortgage rates having continued to ease in recent months and economic conditions proving resilient, there are perhaps greater signs for optimism now over the outlook for house prices than might have been expected coming into the year. Wednesday’s CPI release looks likely to add to that trend of positive news, with expectations for headline UK CPI to fall by almost 2% YoY. This sharp fall in the measure of price rises will come as a result of last year’s increase in the cost of energy falling out of the annualised measure, so is unlikely to surprise markets too much. But if headline CPI prints at the expected 8.2%, this would place it below the path anticipated by the Bank of England in the recent Monetary policy report, which foresees April CPI at 8.4% YoY. If this is what is seen on Wednesday, it would in our view be supportive of a BoE pause at the June meeting, in contrast to current market pricing. With market implied expectations for Bank Rate still predicting almost two further rate hikes, we anticipate that a squaring of these expectations in light of weaker than forecast inflation data is likely to be the key UK specific driver for sterling this week, and is likely to lead some to some downside pressure on the pound.
EUR
With US yields rising, the single currency found itself under renewed pressure last week. This wasn’t aided by the fact that data out of the eurozone continued to undershoot expectations, which put the economic “divergence” story that had previously boosted the euro to the sword. Ahead of tomorrow’s flash PMIs out of Germany and France, which will be key for determining how much the eurozone economy is cooling, the focus for euro traders will be on commentary from ECB members. While not necessarily reflected in FX markets, hawkish commentary from monetary policymakers has pushed up terminal expectations to 3.75%, in line with our house view. Of note out of today’s speakers is Vice President Luis de Guindos at 10:00 BST, perma-hawk Robert Holzmann at 12:30 BST, and Bank of France Governor Francois Villeroy and Chief Economist Philip Lane who both speak at 15:15 BST but at separate events.
USD
Front-end Treasury yields climbed throughout most of the past week as Fed members Logan, Mester, and Bullard signalled towards higher rates. Rising Treasury yields broadly aided the dollar, with the DXY index closing 0.5% higher on the week. However, this dynamic may begin to reverse as on Friday, Fed Chair Powell leant towards a pause in the hiking cycle at June’s meeting when speaking at a conference on Friday beside former Fed Chair Bernanke. Specifically, Powell said “given how far we’ve come, as I noted, we can afford to look at the data and the evolving outlook and make careful assessments.” Compounding Powell’s comments on Friday, Minneapolis Fed President Neel Kashkari said he may support holding interest rates at current levels at the June meeting, Dow Jones reported over the weekend. The combination of both has led Treasury yields lower this morning, weighing on the dollar at the margin. This takes place against a backdrop of still strained bipartisan talks in Washington as President Biden and House Speaker McCarthy are reported to have pressed reset once again on staff discussions over the debt ceiling. As was the case last week, cross-asset price action is likely to remain tentative as debt ceiling concerns remain a priority, meaning that while risk assets are finding some support this morning, early price action could be turned on its head should debt ceiling discussions sour. Outside of debt ceiling developments, traders will be keeping one eye on FOMC commentary as the debate over whether to hold next month remains live. On that note, comments by Fed member Daly at 16:05 will be closely tracked, although they may not be as market moving as peers given Daly isn’t a voting FOMC member until 2024.
CAD
The Canadian dollar was subject to increased volatility last week as cross-asset risk conditions shifted on each set of headlines stemming from debt ceiling discussions, while April’s inflation report reopened the door for another hike from the BoC early next month. When speaking after the publication of the Financial Stability Report, Macklem was seen tempering expectations of another hike, instead placing emphasis on March’s national accounts data on May 31st. However, we think the risk of another hike is larger than markets are discounting. Nonetheless, with only second-tier data due out this week and nothing from the BoC scheduled in the calendar, the loonie’s fortunes are likely to be determined by the political impasse in Washington. This could result in either another volatile week, or in the absence of any developments, a less explosive one. Today, liquidity is likely to be a factor too, with domestic markets closed for Victoria Day.