News & Analysis


Heading into today’s session, traders look set for one final day of respite before what is likely to be an extremely busy week coming up, with the release of labour market, inflation, retail sales and PMI data in the UK next week. In contrast, the only event of note in the UK calendar for today is a speech by external MPC member Silvana Tenreyro. Expectations are for this to be something of a non-event for markets, with Tenreyro’s dovish position on monetary policy well known at the point, and the end of her term on the MPC rapidly approaching. This speech will come on the back of comments by UK chancellor Jeremy Hunt yesterday, where he reiterated the government’s stance on pay restraint, in this case rejecting any negotiations with junior doctors until a demand for 35% pay rises is dropped. Given the enormous size of the demand, the government response is unsurprising, but the consequences of ongoing public sector pay disputes are likely to weigh on both inflation and economic activity over coming months. A talk of greater note for markets did take place yesterday, however, with BoE chief economist Huw Pill speaking at the Market News International Video Conference on “Developments in the UK Economy and Monetary Policy”. Whilst not giving away too much in terms of his view for the upcoming rate decision in May, Pill did highlight the inflationary risks remained skewed to the upside, but with labour markets appearing to cool and data mildly undershooting the Bank’s expectations. Exactly what the read through on this is for policy will be something markets will have to guess at over coming weeks, but in our view, next week’s data will be crucial. If, as expected, the data shows inflation and labour market pressures continuing to slow then a hold of rates at the current level is likely to be on the cards for May. As might be expected for a period with little going on, price action in sterling was modest yesterday, with the pound up 0.3% against the dollar and down two tenths of a percent against the euro. This morning has seen a continuation of that trend, a pattern that looks set to continue as traders prepare for an exciting week coming up.


The feel good factor continued for the euro yesterday as the currency pair broke through its year-to-date high to record a 2% rally from its weekly low and a 1.1% gain on the week. Although broad dollar weakness helped to push the euro higher, it was really the pricing of a more hawkish path for the ECB that pushed the single currency through the psychological threshold. In a somewhat surprising act, that on the surface looks to have been pre-planned, a swathe of ECB officials yesterday came out to re-open the possibility of a 50bp hike at the May meeting. This saw money markets fully price a 25bps hike for the first time since the banking crisis, while they are also now lightly speculating on the possibility of a bigger move. Corresponding with the weaker data out of the US, the hawkish rhetoric saw the spread between US and eurozone front-end bond yields remain at their narrowest point since 2021. Just like yesterday, there looks to be little scheduled in the data calendar to provide fireworks for euro area markets today. But learning our lesson from the ad-lib governing council yesterday, we will be closely watching for any flash headlines from the ECB today, whether that be in the form of more support for a 50bp hike or renewed push back on the idea. The only governing council member set to speak is the Bundesbank President Joachim Nagel at 19:00 BST.


A likely end to the Fed’s hiking cycle after May’s meeting and positive data out of China ahead of next week’s Q1 GDP release provided the perfect mix for currencies within China’s sphere of influence to post a rally yesterday. Whether it was exposure to oil (NOK), precious metals (AUD, CLP, ZAR), or even just China’s growth profile as a whole due to regional ties (KRW, NZD), all of the aforementioned currencies gained over a percent against the dollar. Exacerbating the move that had already begun after China’s trade surplus for March more than doubled expectations at $88.2bn was producer price inflation data out of the US. Not only did the headline figure contract 0.5% MoM, but the less volatile core measures also showed a much sharper pace of disinflation. The data suggests that core goods inflation, which has only just started to tick back up again after a sustained period of easing, is unlikely to trouble the Fed moving forward. Following the release, front-end Treasury yields fell and the pre-existing dollar weakness extended into what was a risk-positive US session. Today, with the dollar DXY index hovering at its year-to-date low, focus will turn back to the stability of the US financial system as US bank earnings are published and to the health of the US consumer as March’s retail sales data is released at 13:30 BST. Understandably, the broader market focus on bank earnings today won’t be on trading revenues or earnings, but instead deposits, especially for March. A rise in bank deposits at flagship names may only exacerbate concerns over the deposit base of regional banks, while signs that some of the more established lenders are also seeing considerable flight to money market funds could also weigh on overall sentiment. In terms of the retail sales data, with expectations already fairly depressed at -0.4% for the headline and -0.6% for the core reading, a reading in line with expectations would be seen as best for the current risk-on backdrop. A more substantive decline, however, will once again sound cause for concern as retail sales data will likely show the effects of the regional banking crisis more vividly as consumers can adjust spending patterns more quickly than firms can with their pricing and hiring decisions. In the event that the retail sales undershoots expectations considerably, the dollar will likely find some support as serious recession concerns once again weigh on risk sentiment.


The Canadian dollar rallied by three quarters of a percent against its US counterpart on Thursday, tracking closely with our April forecast. Yesterday’s rally had nothing to do with Canada, though, as it was driven by a broad based decline in the US dollar, which fell against every major currency except the Brazilian real. Currently, the loonie is sitting at a two-month high. Fresh US data, which showed producer prices unexpectedly declining and initial jobless claims rising faster than forecasts anticipated, were consistent with the story that the US economy is slowing down. The loonie was supported by broad risk-positive sentiment, higher equity prices, and a tightening gap between US and Canadian bond yields. Crude oil prices trimmed back below $83, but remain quite strong relative to recent weeks. Today, the Bank of Canada governor will be speaking in Washington, and Canadian factory sales for February will be released.

FX Elsewhere

Overnight, the Monetary Authority of Singapore maintained its current policy framework. The decision met the expectations of just a third of forecasters, with others including ourselves looking for either a re-centering of the policy band or a further steepening. Behind the decision from the MAS was the need for prudence after five consecutive tightening moves so far. Likely reinforcing the need for a more cautious stance was GDP data for Q1, which printed below expectations at -0.7%. Following the policy announcements, the S$NEER rate fell close to 0.6%, moving it further away from the top of the estimated trading band that it had been hugging for some weeks now. The Singapore dollar’s losses largest against regional peers as it fell over 0.7% against the Korean won, Indonesian rupiah and Chinese yuan, while the move against the dollar was much more muted at -0.35%.



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