News & Analysis


Major dollar pairs bounced around in relatively tight ranges last week as market concerns over a US recession once again dominated. As was the case in previous weeks, however, the data didn’t necessarily provide a clean answer. This led to renewed volatility in US yields, with the yield curve repeatedly inverting and then flattening as traders toyed with the idea of the US 2-year trading back above 4.2% on a structural basis. The mixed signals in the data were most visible in the multiple manufacturing indices for April released throughout the week, with the Empire measure initially showing renewed strength before the Philly Fed index fell significantly and the S&P Global PMI rounded the week off slightly in expansionary territory. While strength in Friday’s S&P measures of economic activity, specifically in services with the PMI printing 2.2 points above expectations at 53.7, looked to have provided the dollar with the cleanest air to trade higher, ultimately the greenback couldn’t hold onto these gains heading into the New York close. This price action is indicative of a temporary holding pattern in the DXY index, which could persist this week with Fed officials undergoing a communications blackout ahead of the May 3rd meeting and no major economic data set for release barring the advance Q1 reading of GDP on Thursday. If the broad dollar is going to envisage some sizable volatility this week, it will likely be triggered by non-US events, in a similar fashion to how UK inflation data last week roiled markets as it sparked renewed concerns over inflation persistence. In this regard, this week’s eurozone inflation data and the first Bank of Japan meeting under Governor Ueda on Friday are likely to prove the most influential, especially given both EURUSD and USDJPY hold the largest weights within the DXY basket.


Despite the huge collection of data releases that landed last week, sterling finished where it began. Surprising perhaps, given the emerging body of evidence that on a headline level at least points to sticky inflation and a higher Bank Rate. In our view, though, it confirms our thesis for sterling: that with terminal rates approaching, FX markets are increasingly looking to other drivers for the next leg in the pound. In terms of what these might be, the next few weeks may not be too insightful as the data calendar is relatively light between now and the next Bank of England meeting on May 11th. That does not however mean everything is quiet as far as the UK is concerned, with news focus likely to increasingly concentrate on the upcoming local elections taking place on May 4th. The political environment is one factor that has been supportive of the pound in recent weeks, with relative stability having returned to the UK with the selection of Rishi Sunak as leader of the Conservative party, and consistent double digit leads beading posted by Labour in opinion polling. However, with this lead beginning to close somewhat, the implosion of the SNP over the past fortnight, and the defenestration of several leading politicians from both major parties, including Deputy PM Dominic Raab on Friday and Diane Abbott over the weekend, a degree of political uncertainty may be re-emerging once again. Outside of politics, the only significant update of note this morning is another data point on the state of the UK housing market, this time from the right move house price index. The release showed MoM growth in house prices slowing to 0.2% in April, from 0.8% the previous month and coming in at 1.7% YoY. Whilst a relatively timely indicator, the index represents the change in asking prices for UK housing, rather than final sale prices, so can be taken with a pinch of salt. However, the slowdown seen in other readings appears to be confirmed again in this morning’s release, suggesting that the long-needed rebalancing in the UK housing market is underway. For policymakers concerned with a housing market implosion, however, these indicators are not yet flashing red, leading the pound to open the week only a fraction lower against both the euro and the dollar.


The single currency closed the week out flat against the dollar, largely because eurozone yields moved in lockstep with those in the US. The 6bps increase in the German two-year occurred as pricing of the ECB’s May decision started to retrace back towards pre-SVB levels, with markets now placing a one in three chance that the central bank continues to move in 50bp increments next week. In our view, given the recent trend of stronger growth data and the appetite by some amongst the Governing Council to tamp down on domestic inflation pressures, the chances of the ECB hiking 50bps next week are greater than that assigned by markets. Instead, the 33% implied probability likely reflects some caution ahead of Friday’s inflation data out of France, Spain, and Germany. Should regional measures of core inflation not turn a corner, as implied by the latest PMI prices paid sub-indices, markets are likely to price a greater chance of a 50bp hike next week, which could unlock the 1.10 region for EURUSD. Following on from hawkish comments by the Belgian central bank chief Pierre Wunsch, who told the Financial Times that the ECB could hike to as high as 4% as the central bank awaits core inflation and wage growth to cool before the it is likely to pause, markets are set to hear from ECB speakers including Villeroy and Vujcic and Panetta. However, given that the topics in focus are primarily climate change, the foundation of the euro and CBDC’s, it is likely to be only Panetta’s speech at 10:00 BST that is of interest to markets, alongside those of de Guindos on Wednesday at 13:00 BST and President Lagarde on Friday. It seems unlikely that any comments markets do get to hear from these speakers will be as hawkish as those from Wunsch, but analysts will be maintaining a sharp ear for any signs of push back, or further hints that a 50bp hike on May 4th could be on the cards.


The Canadian dollar slipped 1.17% over the course of the past week, it’s largest five-day decline since the week of the regional banking crisis in the US. Driving the decline in the loonie has been renewed pressure on US equities, rising US yields, increased pressure on Canada’s growth profile due to substantial strikes within the civil service, and concerning signs within lagged retail sales data. This week, with the domestic data calendar unlikely to provide much new information for markets given the contents of the BoC meeting minutes on the 26th are largely known following multiple public appearances from BoC Governor Macklem since the last policy decision and GDP data on the 28th is even more lagged than peers, volatility in USDCAD is likely to subside ahead of the next Fed meeting.


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