News & analysis


Sterling is sitting near the top of the G10 board this morning as the next phase of the economic reopening in England is buoying market sentiment around UK assets. Generally, the dollar is firming against G10 counterparts as slower growth conditions in China weighs on market sentiment. However, sitting roughly flat against the dollar, sterling is only underperforming JPY which is also higher on the downturn in risk appetite. Data over the weekend highlighted similar concerns in the UK to those seen in the US, with labour market shortages in hospitality and retails work appearing. Online job adverts for catering and hospitality roles are running above pre-pandemic levels for the first time since the start of the crisis, having almost trebled since the stay at home order lifted at the end of March according to job engine Adzuna. A similar dynamic has been apparent in the US too, leading to major institutions lifting minimum wages for lower-income positions in order to fill staff shortages. This only adds to the underlying inflation pressures which have started to arise and cause volatility in markets. This week, the UK gets further data owing to the nature of the economic rebound once lockdown measures are eased. On Friday, retail sales data for April will be released and will show how robust the consumption rebound was once measures were partially eased on April 12th. After the first piece of hard consumption data is released since the first stage of reopening, preliminary PMI data for May will show how the services sector has fared with the marginal reopening in April and improved sentiment around the May 17th easing.


The euro is back trading above last week’s lows against the dollar, which were brought about by inflation fears that briefly sent the US dollar higher after the CPI release. However, EURUSD sits marginally lower this morning as headlines around China and the UN weigh on market sentiment. The UN Security Council held its first open meeting on the Israel-Palestine crisis after local health officials reported the deadliest attack of the current hostilities since the start of the raging conflict. Still, the council took no action. Headlines around the eurozone meanwhile remain sparse, with the accelerating vaccination campaign continuing to be the broader currency driver as the continent has been accelerating its roll-out, reaching over 20% of its population with at least one dose. Meanwhile, infections have pushed sharply lower while many eurozone countries have been easing lockdown restrictions in the past month. The fact that there has not been a bounceback in cases bodes well for further lockdown easing and European growth. In the absence of any major data prints today, markets will focus on the European Central Bank’s weekly purchase rate of its Pandemic Emergency Purchase Programme. This has been increasingly in focus over the last month as the average weekly bond-buying rate increased further after the ECB signalled a ramping up in its PEPP asset purchase pace initially. At 17:00 BST, Russia comes out with its Q1 GDP figure which is set to print at -12.% after January and February saw annualised GDP decline by over 2%. Beyond this, markets will look for headlines around today’s meeting of the euro-area finance ministers.


Last week’s FX price action was all about inflation after poor US Nonfarm payrolls combined with apparent wage growth started a debate around wage growth pressures despite an elevated unemployment rate, as supply constraints seem to be leading to a reduced level of slack in the US labour market. This compounded concerns that inflationary pressures would be greater than initially expected, and last week’s CPI further confirmed that as they showed inflation exceeded already elevated expectations. While this further stoked inflation expectations, it did not spill over into real yields as the Fed’s reaction function anchors market expectations around a rate hike. For the US dollar, this meant that the initial strength seen after the CPI release almost immediately faded, which had EURUSD trading back towards the middle of last week’s range again. This morning, the US dollar is trading in the green against most G10 currencies as a deterioration in risk sentiment took a modest toll at currency markets, with JPY being the only currency holding strong against the dollar. This deterioration was largely due to Chinese economic data undershooting market expectations. With markets sensitive to how exceptional the US economic performance is this year relative to peers, the data from China filtered nicely into a bout of USD strength. Federal Reserve Vice Chair Richard Clarida and other colleagues are set to speak later today and will likely hammer home the message that inflation is transitory, which may weigh on the dollar in today’s latter part of the trading session although moves should be modest as comments around this topic are likely to be in line with earlier Fed communication.


After touching a fresh 6-year high in last week’s trading session, the loonie has struggled to break new ground. Developments domestically proved to be slow going last week, with Governor Tiff Macklem’s speech at the Atlantic Universities being the stand out economic event. On Friday, however, slower retail sales in the US, which resulted in a broadly weaker dollar, and strong wholesale trade sales in Canada in March helped the loonie to recover previously lost ground. Wholesale trade sales rose above expectations at 2.8% MoM in March, helping the loonie to consolidate a 0.5% rally on the day. This morning, however, the Canadian dollar joins the rest of the G10 in sliding lower against the greenback as global growth conditions weigh on market sentiment. This week, loonie traders will be keeping a close eye on how domestic inflation prints on Wednesday following a strong reading in the US last week, while retail sales data for March will also be viewed in the context of stronger Q1 growth than initially expected.


China’s industrial output growth slowed in April relative to March and retail sales significantly missed expectations. Retail sales rose 17.7% YoY while growth in industrial production eased to 9.8% YoY, both dramatically undershooting expectations that had already adjusted for a slowdown in growth as base effects became less favourable. Factory activity slowed amid supply bottlenecks and rising costs while the domestic demand recovery is weaker than initially expected. Nevertheless, exports remain strong thanks to growing demand for Chinese goods in the US and stalled factory output in China’s trading partners. However, the slowing of the Chinese economy as it returns to trend growth is starting to concern the Peoples Bank of China. The PBOC has set the daily fix marginally weaker than analyst expectations for the last week or so now. The trend is starting to become somewhat symbolic of the central bank’s concerns as it looks to push back any further CNY gains as growth conditions moderate. While these daily fixings tend to be quite noisy, emerging trends tend to signal the central bank’s tolerance to markets. The move by the central bank comes as the yuan sits just over 10% higher against the dollar since its pandemic induced low back in 2020.



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