The FX rollercoaster continued in yesterday’s session, as best evidenced by price action in GBPUSD. The pound fell over a percentage point in yesterday’s trading, reversing nearly all of the 1.41% rally recorded on Tuesday–a near complete loop the loop. Pressure on the pound largely came from broader market dynamics, which favoured a stronger dollar as equity markets experienced a new round of selling, however a slight under-delivery in April’s CPI report didn’t help the pound weather the external pressures. Despite US equity futures trading in the red this morning, and European equities trading lower on cash open, the pound has rallied at the margin. The volatility in GBPUSD within ranges is synonymous of a rollercoaster ride as the end of the ride is usually back at the beginning of the ride. In lieu of any domestic data today, sterling traders will keep an eye on developments in the eurozone and the impact that will have on GBPUSD via GBPEUR, while political developments will also be in scope after Rishi Sunak urged businesses to boost investment with a promise of a tax cut in the Autumn budget ahead of a planned corporation tax rise next spring. On fiscal support for households, Sunak warned that further measures to help consumers buffer the cost of living crisis would only further stoking inflation. This is a stark turnaround from recent reports out of Downing Street, which suggested that further support was imminent.
The single currency has largely been shifted around by broader market conditions this week. While more hawkish commentary from ECB members, like Klaas Knot, who suggested that 50bp increments could come into scope if inflation pressures accelerate or broaden, and Olli Rehn, who stated that the ECB needs to move quickly when tightening, have supported the euro at the margin, the single currency remains vulnerable to broader risk conditions. However, with EURUSD trading back close to its mid-April to mid-May range, the discussion of EURUSD hitting parity has fallen to the shadows, for now. Today, the main event for the single currency is the publication of the ECB’s April meeting minutes, although the event has reduced in importance given inter-meeting communications have firmed the prospect of a rate hike in July.
The downturn in US equities was the standout development in markets yesterday. The S&P500 fell over 4% on the day, with the NASDAQ and Dow Jones Indices also falling by similar magnitude. The sell-off was driven by consumer stocks as some of the biggest retailers faced profit warnings, the first sign that higher inflation is starting to bite for the US consumer and lead to margin suppression for businesses selling discretionary goods. While the dollar was already trading on the front-foot ahead of the US cash open, the downturn in equities helped the greenback extend gains. The DXY index closed out the session up 0.46%, retracing two-thirds of the decline seen on Tuesday. Today, the focus will remain on equities, especially consumer and growth stocks, as the US data calendar remains light. Just initial jobless claims for the week ending May 14th is released, while on the Fed front only Minneapolis President Neel Kashkari is set to speak on inflation at 21:00 BST.
Canada received its latest inflation data yesterday, the final inflation print ahead of the Bank of Canada’s June decision. The report, which showed both headline and core inflation rising rapidly, helped to crystallise the likelihood of a 50 basis point interest rate hike on June 1. The initial reaction in CAD was limited owing to the fullness of money market pricing, which has remained relatively stable over the past four weeks despite significant volatility in most markets. However, despite the data confirming a more hawkish BoC tightening path remains intact, the loonie ended the day 0.16% weaker, largely on the back of diminished risk sentiment that saw equities fall significantly as evidenced by the S&P 500 (-4.0%), NASDAQ (-4.7%), and TSX (-1.9%). Oil prices fundamentally supported the move, falling 2.8%, but as we have often written of late, today’s markets are trading on sentiment, not fundamentals. Canadian bond yields fell 1bp at the 2Y mark, and 8bps at the 10Y mark, roughly in line with the US.
FX Elsewhere – a rumbling down under
The Aussie dollar continues to portray increased levels of intraday volatility, owing not only to the more volatile market conditions globally, but also the finely poised debate over the Reserve Bank of Australia’s next move. While yesterday’s data saw an underwhelming wage price index for Q1, in the early hours of this morning labour market data from April showed robust undertones. Although headline employment undershot expectations, with just 4,000 jobs added relative to the expected 30,000, this was largely due to losses in part-time employment as 92,400 full-time jobs were added in the last month. In combination with upwards revisions to March’s employment data, the unemployment rate fell to 3.9%. Such low levels were last seen in in August 1974, when the labour market data was reported quarterly. In addition to the historically low unemployment rate, hours worked also ticked upwards. The tightness in the labour market keeps the prospect of a larger-than-25bp hike on the table for the RBA at its next meeting in June. Further indications that a 40bp hike is the likeliest scenario will likely keep AUD well supported.