After a string of poor consumer spending data yesterday morning, the pound quickly reversed course to retrace a large chunk of earlier losses as May’s preliminary services index, which showed the fourth largest one-month drop in the index on record, was revised 1.3 points higher to 53.1 in the final reading. More importantly for markets than the upwards revision of the headline figure was the improved employment backdrop. In the flash report, the press release noted that job creation eased slightly in May as firms looked to reduce costs by not replacing voluntary leavers. However, in the final report, the rate of job creation was seen as unchanged from April, with many firms looking to rebuild capacity. The improved labour market backdrop will offer the Bank of England some assurances that the current level of policy isn’t too restrictive and could be tightened further if viewed in isolation. A decline in US yields towards the back-end of the afternoon session in Europe extended the pound’s recovery, leaving GBPUSD some 0.45% higher on the day. This morning, the pound resumes trading on the back foot as US yields start the morning trying to push higher yet again. Developments in Westminster aren’t helping sterling’s prospects either as people familiar with the matter state that Boris Johnson will push forward with legislation to override parts of the Brexit deal, a move that could inflame tensions with the EU and spark trade restrictions during an already low growth/ high inflation environment.
Aided by hawkish central bank communications of late, the single currency buffered the broad dollar strength reasonably well during the early part of yesterday’s European session, while posting mild gains on the day as the US dollar retreated with Treasury yields. This morning, the single currency resumes trading lower along with the broad G10 space. Germany’s industrial production data for April provided limited reason for EUR traders to pushback against the broad dollar strength too as the data printed 0.5 percentage points below expectations at 0.7% MoM. The industrial production data is only set to sour further as Europe’s production powerhouse heads into H2. With just the final reading of Q1 GDP data at 10:00 BST, the euro is left to the mercy of broader market forces today. However, moves in EURUSD are likely to be more limited than other G10 currency pairs as traders position for tomorrow’s highly anticipated ECB meeting.
Markets zoned in on the stronger US growth backdrop to reprice more hawkish expectations of the Federal Reserve in the early parts of this week. Higher US yields were placing pressure on equities and risk-sensitive currencies. However, micro news out of yesterday’s session, specifically from Target who cut their operating profit for Q2 for the second time in three weeks due to elevated inventories, highlighted that the consumer demand picture isn’t as clearcut in the US as recent data seemingly suggested. Over the course of the day, US yields began to moderate as growth concerns worked their way back into the minds of fixed income traders, with the US 10-year falling back below 3%. We highlighted in our June FX forecasts that this on-off switch between pricing a more aggressive Fed policy path and then factoring in increased growth risks was only going to persist this month, inducing elevated intraday volatility. While yields start the session higher and equity futures point lower yet again, a turnaround at the US cash open may take place yet again today. With limited US economic data out ahead of Friday’s CPI data, the broad dollar will continue to be dictated by cross-asset moves.
The Canadian dollar rallied strongly after North American equity markets opened yesterday, trading on renewed risk sentiment that saw the S&P 500 rise by 1%. Rates and commodity markets sat in the back seat, offering little direction for FX traders on another quiet day with little data. Trade data for April, a second-tier data release in terms of importance for the loonie, showed the goods trade balance fell as the increase in nominal imports outpaced the gain in nominal exports. Perhaps the most interesting piece of information in the report was that the prices of both imported and exported goods rose substantially – both by more than 2% on the month. That’s quite the large gain when compared to the Bank of Canada’s inflation target, which hopes to see 2% inflation over the course of a full year, not a single month. With that in mind, it’s clear that the Canadian economy still faces substantial external inflationary pressures. That puts the Bank of Canada in a bit of a bind, given its renewed forceful commitment to abate inflation, as the Canadian economy is more or less a price taker on the global scale, with little ability to influence global prices. Deputy Governor Beaudry’s comment in the press conference last week that “we’ll do what’s necessary” to get inflation back to 2% was reminiscent of former ECB President Draghi’s famous “whatever it takes” line from way back in 2012. Only time will tell if the BoC is capable of filling those rhetorical boots, but for now, the more hawkish sentiment from the BoC is providing the loonie with a strong footing to continue trading on the front foot at the start of this month.
The National Bank of Poland are set to meet today, with expectations centring around a 75bps hike. However, with a string of high inflation reports setting the backdrop for the NBP, the risks to a more aggressive 100bp hike like that seen in April is elevated. The continuation of a more hawkish NBP along with reducing market tensions in the region due to the war should provide a tailwind for the recovery in the zloty, which sits just 0.7% weaker against the euro but over 7% lower against the dollar relative to pre-war levels.