News & Analysis

USD

By all accounts, yesterday was a benign day in FX markets. Little in the way of global data and disruptive commentary from monetary policymakers meant that high beta currencies such as CZK, ZAR, and TRY sat comfortably near the top of the expanded majors. As has been the case recently, the Japanese yen bookended the other side of the rankings, depreciating only a marginal 0.3% against the dollar as traders continue to rotate back into short JPY positions as the effects of the BoJ’s intervention a fortnight ago fade alongside the risk of further intervention as long as the yen depreciation occurs in a more orderly fashion.

Although not a market-moving release, the sole data point out of the US did garner some attention yesterday given the focus this week is squarely on inflation data. The New York Fed’s inflation expectations survey saw the 1-year ahead measure tick up to 3.26%, reaching its highest level since November after four particularly stable readings at 3%. While one survey measure isn’t necessarily a concern for the Fed, it underscores our view that the risks remain tilted to the upside for this week’s inflation data, starting today with April’s producer price index at 13:30 BST. Here, core PPI is expected to print at just 0.2%, a level which, in isolation, will provide US policymakers with a degree of comfort. However, on an annual basis, this would see core producer price growth cool only 0.1pp to 2.3%, a level that still fuels concerns over inflation persistence above the Fed’s 2% target.

Consensus for tomorrow’s CPI print offers a similar conundrum. While a reading in the region of 0.28-0.3% as per consensus would mark a slowdown in the pace of core inflation growth from Q1, it would still produce an annualised run rate north of 3.4%, leaving the Fed short of the necessary confidence to cut rates. Even a drop in the pace of core inflation into the low 0.2s won’t prompt much of a rout in the dollar as it should fuel questions as to why inflation conditions have cooled so rapidly. If met with a weak round of retail sales, this could spark a traditional risk-off session in markets, leaving the dollar vulnerable to just JPY and CHF. Moreover, if our expectations are met and core inflation lands in the mid-to-high 0.3s, markets are likely to trim the prospect of multiple Fed rates hikes for this year again, prompting another wave of USD appreciation against rate sensitive currencies like JPY, KRW, SEK and some EM high yielders. As such, despite the dollar starting the week on the back foot, we think the inflation data this week alone presents limited risks to our bullish USD call in Q2.

EUR

Quiet market conditions yesterday saw the single currency drift higher against the dollar. While some traders felt emboldened to see how far the euro could rally in this environment, a break above the psychological 1.08 handle proved brief, underlining our view that something significant would need to change, likely in the rates space, for EURUSD to climb higher. While this week holds the potential for such a move, given the right “soft landing” mix of data out of the US, i.e. healthy retail sales and significantly softer core inflation pressures, and an improvement in economic sentiment indicators and GDP data out of the eurozone, we think it remains too early to turn constructive on EURUSD. Nevertheless, the more stable data outturns have seen the calls of EURUSD returning to parity this quarter drift back into the shadows, where we warned they belonged at the time. Ahead of GDP and CPI readings tomorrow, the focus today will be on the German ZEW survey at 10:00 BST and the US PPI report, though we doubt either packs enough of a punch to put EURUSD back above 1.08.

GBP

The biggest data point of the week for sterling traders landed this morning, coming in the form of March wage data. As implied by BoE Governor Bailey just last week, the two rounds of wage and inflation data set to be delivered before the June policy meeting will be key for determining whether the Bank begins easing policy in June or August. Given this, today’s figures are set to be scrutinised closely by markets, though we doubt they offer little clarity on the BoE’s next actions on first reading. On the one hand, headline readings overshot expectations, with average weekly earnings growth flatlining at 5.7% 3m/YoY against expectations of a 0.2pp decline. On the other hand, private sector regular pay undershot Bank staff forecasts by 0.1pp. To cap all this off, although there were some signs of a reacceleration in pay growth in the volatile monthly estimates, whether or not this was attributable to April’s National Living Wage rise – or if this is still to come – remains an open question. All told markets have largely taken this latest data in their stride, with sterling unmoved given the uncertain readthrough for policymakers. This now leaves April’s wage data as key for the BoE, with this set to land just over a week before the BoE’s June policy meeting.

CAD

Yesterday saw the loonie trade in relatively tight ranges for the second consecutive session, even as data last Friday showed the Canadian economy adding a bumper amount of jobs last month. As we noted at the time, one swallow doesn’t make a summer and neither should one data print derail the BoC’s policy path. Markets have taken a similar view; while the probability of a rate cut next month has fallen to 40%, CAD swaps are still pricing a full rate cut by July’s meeting. This has meant that irrespective of the data, the spread in front-end yields between the US and Canada has remained fairly stable at 57bps. With equities producing nothing amazing yesterday aside from the re-emergence of pandemic-era meme stocks, this left CAD traders with very little to go off. That should be the case once again today, with only US PPI data set for release at 13:30 BST. While the data will be somewhat informative to the Fed’s inflation battle, we doubt traders will take a firm position on it with the more crucial CPI report due out tomorrow.

 

 

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