Sterling traded flat against the dollar over the course of the past week in the absence of any domestic data releases and given that the spillover effects from an improved risk environment soon reversed on Friday as the pound fell 0.86%. This week, the domestic data calendar comes back online for the pound and will be crucial for the Bank of England’s next steps. February’s jobs report on Tuesday and March’s inflation data on Wednesday stand out as the most impactful for the BoE’s next steps, especially given the BoE’s emphasis on monitoring wage measures as a source of persistent domestic inflation and given February’s PMIs showed labour demand was coming back online. However, with retail sales for March also released on Thursday and flash PMIs for April released on Friday, investors will receive a full MOT on the UK economy this week.
The narrowing in the US – German yield spread hit some resistance towards the end of last week as the upwards reassessment in the US 2-year on comments from Governor Waller outpaced the rally in eurozone yields on an ECB sources story confirming the debate within the Governing Council is currently between a 25bp and a 50bp hike in May. With the euro trading at its year-to-date high at the time this took place, the single currency sold off 0.6% against the dollar to return back to the tight trading range it traded within for Q1. This week, the upcoming policy decision by the ECB will remain top of mind for traders, especially with a fairly dense calendar for ECB speakers and the publication of the March meeting minutes on Thursday. Outside of rate differentials, growth conditions will also remain focal for the single currency. China’s GDP release for Q1 on Tuesday could have positive spillover effects for the eurozone growth profile, which could become visible in Friday’s flash PMI release for April. As a pro-cyclical currency, a better external growth profile will likely be a tailwind for the euro.
Growth conditions dominated last week’s session, even in the absence of any direct data on economic activity. Instead, inflation reports, Fed meeting minutes, FOMC inter-meeting commentary and retail sales on Friday were all viewed in the context of economic output. While for a large part of the week the data confirmed that the US economy wasn’t spiralling into a recession prior to the tightening in credit conditions, thus spurring risk assets to rally, Friday’s headlines played into the idea that the Federal Reserve may need to hike to a higher terminal rate than the 5-5.25% range currently priced into markets. Causing the most damage in markets that day was commentary by Fed Governor Christopher Waller, who stated that he favoured more monetary tightening to reduce persistent inflation unless credit conditions have materially tightened. Compounded shortly after by a full percentage point spike in the 1-year ahead University of Michigan measure of inflation expectations to 4.6%, Treasury yields soon began to notch higher once again with the 2-year retracing back above 4%. This saw the broad dollar retrace around 0.56% to climb back off of its year-to-date low.
The choppy decline in the greenback last week epitomises our view for the broad dollar moving forward. While we continue to see the case for a structural decline, it remains a fine balance for the economic data to support a consistent downwards trend. This week, emphasis is likely to remain on growth conditions and whether the US economy continues to hold the same level of exceptionalism it did towards the end of last year. In what is a fairly light week for US data, the Fed’s beige book on regional economic conditions will be closely monitored for signs of distress for SME credit, while Friday also sees the publication of April’s preliminary PMIs. The US data will also face up against key data releases from the UK, eurozone, and China. Should external growth conditions continue to outpace that of the US, the dollar may slide further into the trough of the dollar smile.
The Canadian dollar was one of the better performing G10 currencies last week as signs of a better growth outlook in the US played into the hands of the Canadian economic outlook and overall risk assets. Additionally, the loonie’s losses on Friday from an upwards reassessment in the Fed’s hiking path were also relatively well contained, a likely by-product of the BoC’s recent hawkish bias. This week, March’s inflation report is published on Wednesday while retail sales data for February is reported on Friday. While this could prompt some volatility in the USDCAD pair, generally we think external factors will remain in the driving seat for the currency pair.