News & Analysis


As British workers return to the office following the first of two long bank holiday weekends, they find themselves greeted by two new pieces of data painting with mixed implications for the UK economy. First the BRC shop price index, published just after midnight, showed an increase of 8.8% YoY. This is down from 8.9% seen in April, but still points to prices that are rising uncomfortably fast for the Bank of England. As noted in several of our recent pieces, whilst we expect inflation to begin to fall rapidly through the remainder of 2023, the evidence for this is not yet in and as such, we expect the BoE to raise rates by 25bp to terminal at the upcoming MPC meeting on May 11th. This would leave Bank Rate at 4.5%, a level which should be well into restrictive territory and sparking discomfort in some quarters around the risk of sparking financial meltdowns as seen elsewhere in recent weeks. However, at least one of the commonly cited triggers for such a scenario, housing, is yet to show significant signs of stress. This was confirmed yet again this morning with the release of the latest edition of the Nationwide house price index. Whilst YoY figures showed a decline in prices of 2.7% this was well above the 3.7% that had been expected. Even better news came from month on month figures, which had anticipated a 0.5% fall in April, instead seeing a 0.5% increase. The robustness in the housing market is likely to give policymakers some confidence that they can raise rates with a reduced chance of triggering some unintended consequences, and this is likely to translate to FX markets in the form of sterling support over the medium term.


With many European markets closed yesterday, the euro took a bit of a beating as it fell by 0.4% over the course of the session. As markets reopen this morning, and the next ECB rate decision imminent, attention will continue to be on eurozone inflation data as markets still digest last week’s releases, while the outcome of the Q1 bank lending survey at 09:00 BST will also be in scope given concerns over financial stability in March. Printing at 10:00 BST, markets will finally get answers to where core inflation will land, with the preliminary release of the eurozone composite CPI figures. Following last week’s publication for France and Germany, expectations are for a flat reading of 6.9% on the headline numbers, whilst the core figure is expected to tick down from 5.7% to 5.6%. Barring any surprises, this suggests the peak for eurozone inflation may now be in, and reinforces the argument for a 25bp rate hike this week, despite speculation over the past fortnight that the ECB might opt for a larger 50bp rate increase. In our view this would still not bring the ECB to its terminal interest rate level, with more needing to be done to bring inflation down to target levels on a sustainable basis. As such, the debate over the size of rate hikes is really more a question of timing of increases, for now at least. Markets should get more clarity on the ultimate destination for ECB policy rates on Thursday in the ECBs communications. Having recently emphasised the data dependence of their interest rate decisions, this might set up some traders for disappointment, but we don’t see today’s inflation data as likely to move the needle too much. With far more important news coming up later in the week, it seems likely that any reaction to today’s release will be modest.


After several weeks of doom and gloom around the state of the US economy, yesterday’s ISM PMIs helped breathe a degree of optimism into markets, reigniting bets for a more hawkish Fed. The April release of the ISM manufacturing numbers beat expectations, rising to 47.1 against 46.8 expected and up from 46.3 previously, indicating a stronger US economy than anticipated. This pattern of improvement was repeated across the board: prices paid, employment, and new orders all bounced, pointing not only to better than expected activity, but also to more robust inflationary pressures. As a result, market expectations for the Fed jumped on the news. Pricing last week had suggested a 20% chance of a hold at the upcoming meeting, this is now under 5%, with a one in four probability of a further rate rise in June. This uptick in expectations for the Fed led treasury yields higher with the US 2Y yield up 13.4bps and the 10Y up by 14.6bps. The uprating in expectation also had implications for the dollar, producing a roughly half a percent climb against the euro in response to this new data. However, risks remain on the horizon and markets should be wary of getting complacent. Despite US authorities successfully arranging the sale of First Republic to JP Morgan over the weekend, a move that helped calm market nerves, the fact that yet another US regional Bank found itself in trouble points to systemic risks that may continue to weigh on the US economy. And these risks are not just limited to banks. Comments by Treasury Secretary Janet Yellen yesterday suggested that the debt ceiling may come into focus for markets earlier than expected, with a chance that it could now bind on June 1st as a result of underwhelming tax receipts. With these risks on the horizon, we still expect the Fed to hike at the upcoming meeting, in line with prior communications, but in our view this will almost certainly be the last rate rise of the cycle. Closing rate differentials and emergent risks point to a different dollar dynamic moving forwards and underpins our expectation for modest dollar decline over coming months. For now though, the dollar is continuing to hold its own, particularly of note against JPY. With the BoJ undershooting markets expectations yet again with its plans for exiting YCC last week, the growing rate differential expectations have seen USDJPY rise over 2.5% since last Thursday, and continuing to grind higher this morning.


The Canadian dollar closed the North American trading session virtually unchanged, with an improving S&P manufacturing PMI for Canada and stronger ISM manufacturing data out of the US helping the loonie avoid losses seen in most other G10 currencies, despite a -1.4% move in the price of crude. Today could also be another quiet one for CAD, as no Canadian data releases are scheduled. Despite the inactivity in the domestic economic calendar, the news cycle in Canada wasn’t quiet. The main story yesterday was that the public sector union came to an agreement on wage negotiations. The government agreed to 3 percent per year over four years, rather than the three years it had initially offered; the union had been pushing for 4.5 percent per year over three years. The other sticking point was the work-from-home policy, which again saw both parties compromise. While the government did not enshrine work-from-home as a permanent benefit, it agreed to impose rules that would ensure each work-from-home request is assessed on an individual basis, and that managers must justify their decisions in writing. Some 35,000 Canada Revenue Agency workers remain on strike, however, as the CRA has asked for 7.5 percent per year over three years and no deal has been reached.

FX Elsewhere

In a development overnight that might have surprised some, the RBA raised the Cash Rate Target from 3.60% to 3.85%. This move comes despite the consensus of Bloomberg economists that the RBA would choose to hold rates constant and markets pricing just 3bps of tightening, but is in line with what was signalled in previous minutes and our view of an RBA terminal rate in the vicinity of 4.1%. It remains to be seen if this will be the final hike from the RBA, with markets currently assigning a small probability to the likelihood of a future rate rise, but AUDUSD responded positively to the surprise news all the same, jumping roughly 1.2% on the back of this morning’s announcement.



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