News & Analysis


A mixed day of dollar trading on Thursday saw the greenback initially soften through the morning, before spiking on the release of Q1 GDP and then ultimately giving back those gains to leave the DXY index to finish down by quarter of a percent. In some ways this reflects the mixed bag of signals that markets received. In particular, GDP figures offered a notable headfake on US growth conditions. Whilst headline GDP fell to 1.6% QoQ annualised in Q1, the details of yesterday’s report proved much stronger. Notably, Core PCE printed at 3.7% in Q1, exceeding expectations for a reading of 3.4%, and far too hot for the Fed to consider cutting rates any time soon. That said, this also left markets to contemplate the idea that the US economy may be heading towards stagflation and not a soft landing. Given our view of the data, we think worries of stagflation look a little premature. Nonetheless, with these outcomes holding very different implications for the dollar, price action yesterday was naturally choppy.

Overnight, all focus was on the BoJ, especially with USDJPY trading above 155, the commonly assumed line in the sand that would likely trigger pushback from authorities. It was somewhat surprising then to see the BoJ leave guidance broadly unchanged. While no move on rates was expected, the Bank’s forecasts only saw minimal tweaks, albeit accompanied by an indication that inflation risks were tilted to the upside and a note that FX developments would need to be monitored. Indeed, subsequent comments from Governor Ueda have done little to dispel the notion that this was a more dovish outcome than markets expected, leading USDJPY to climb through the 156 level this morning.

This move higher for USDJPY leaves FX traders on intervention watch once again heading into the weekend, with many scratching their heads over exactly what could trigger FX intervention from Japanese authorities. While this should see traders keeping one eye on Asia today, the other is likely to be focused on the US, with March PCE data now the main risk event left for markets to clear. Barring any revisions to previous months, core PCE should print at 0.5% MoM, well above the 0.3% expected by markets. While this shouldn’t come as a huge surprise given yesterday’s data, this should confirm that a high for longer Fed remains the base case for this year, an eventuality that should see the dollar firming at the margin following yesterday’s selloff.


A raft of second and third tier data prints did little for the euro on Thursday, with ECB speakers also offering little new information, leaving EURUSD to trade on the back of events in the US. This saw the pair ultimately climbing by three tenths in advance of what should be a relatively quiet end to the week for the single currency, with consumer confidence data and inflation expectations the only major releases of note. With these data prints unlikely to significantly move FX markets, US PCE is likely to determine the fortunes of EURUSD today once again. That said, having strengthened marginally on Thursday, if core PCE beats expectations, as looks likely, then EURUSD should see some of yesterday’s gains reversed heading into the weekend.


Yesterday’s broad dollar easing saw GBP post some decent gains, up four tenths on the greenback on Thursday. That said, we think GBPEUR was once again more reflective of sterling fundamentals. The pound notched marginal gains against the single currency, despite minimal market moving data out of Europe. This is in line with our base case that better UK growth and a BoE that is set to keep rates high for longer than the ECB should both work to support GBPEUR upside at the margin through the next few months. This morning, we are expecting more of the same, with only the only UK release of note being GfK consumer confidence. April’s print modestly beat expectations of a -20 reading, landing at -19, leaving markets to shrug this off, and leaving the run into the weekend a relatively quiet one for sterling traders.


Dollar dynamics were front and centre for loonie traders yesterday. USDCAD ultimately eased by three tenths, but only after a  rollercoaster ride following the release of US GDP. That said, we also think that yesterday’s domestic releases out of Canada are also worthy of note, despite markets appearing to overlook these for now. Specifically, both the CFIP business barometer and the SEPH employment reading pointed to a further slowdown in the Canadian economy. The former slipped to 47.5, down from 52.9 in March. The latter indicated that 17.7k jobs were lost from the economy in February. Despite this, BoC easing expectations now indicate just a one-in-two chance of June rate cut, having been nudged lower by US data once again on Thursday. This looks mispriced to us. Domestic data is offering an increasingly clear steer that the BoC needs to start cutting rates, and soon. As such, the loonie looks rich at current levels. That said, we doubt this will change today with a US PCE release due, and likely to beat expectations. Given the market bias to see BoC easing expectations track those of the Fed, we suspect that any realignment of loonie pricing with fundamentals will likely have to wait until next week.



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