News & Analysis


Despite a brief hiccup on Thursday following a seasonal uptick in initial jobless claims, the dollar spent the majority of the past week retracing its early May slide. Ultimately, the DXY index closed 0.25% higher on the week, with the move primarily fuelled by events outside of the US highlighting that despite markets turning more dovish on the Fed once again, divergence in policy should remain supportive of a stronger dollar. In Europe, both the Riksbank and the Bank of England turned moderately more dovish, with the former cutting rates amidst weaker growth and inflation data and the latter downgrading its inflation forecasts to show markets had turned too hawkish on its policy path. While the picture was more mixed in Asia and Latin America, that didn’t stop the dollar from moderately advancing over the past week, with both the DXY index and the MSCI emerging markets index closing the week slightly higher. The Japanese yen and the Brazilian real were the big movers on the week, ending the week at the bottom of the expanded majors with losses in excess of 1.5% even as BoJ Governor Ueda sounded more hawkish on the need for policy to respond to JPY weakness and the BCB voting to decelerate the pace of easing contrary to its previous forward guidance. At the other end of the spectrum was the Chilean and Mexican pesos. In the case of Chile, stronger inflation data caused markets to turn more hawkish just as precious metals prices provided a terms-of-trade boost, while in Mexico Banxico’s decision to unanimously hold rates saw markets buy into our view that the easing path would be bumpier than other LatAm peers, with cuts likely at every other meeting.

Despite the volatility in Japan and Latin America, the past week saw most expanded majors trade well within recent ranges. This was in large part due to how light the US data calendar was, and even though there was a litany of Fed speakers, policymakers exerted caution with their comments as they were conscious not to sound too confident following the softening in the payrolls data without confirmatory data suggesting disinflation has resumed. This week, markets and policymakers could potentially receive that confirmation as expectations are for April’s CPI data on Wednesday to show a further softening in the core measure. If expectations are met, pricing of a rate cut from the Fed on July 31st should rise from 30% currently to around 50%, with further confidence subject to confirmation in the subsequent two CPI reports. If this transpires, we expect the dollar to take on water against high beta currencies like AUD and NOK, which despite their more hawkish central bank and commodity backdrops, have been hampered by overall risk conditions and higher Treasury yields. That said, given the underlying pace of services inflation and the limited overall drag from core goods inflation, we think it is too soon for markets to really gain confidence that inflation persistence was an isolated story for 1Q24. In fact, we continue to look for core inflation to print at 0.4% MoM on an unrounded basis, 0.1pp above expectations. If realised, this should lead Treasury yields back towards recent highs, and the DXY index to trade back close to the 106 handle, which it broke through at the beginning of the month following the Fed meeting and the last round of BoJ intervention.


As we expected, the single currency traded within a tight range last week around the 1.0750 handle, swinging just 0.62% on the week as a whole. Behind the limited volatility was an absent eurozone economic calendar and just initial jobless claims data out of the US. Although the latter did provide some dollar weakness, its significance as a data point wasn’t enough for EURUSD to break key psychological levels. This week’s data calendar does hold the potential to see EURUSD break out of the 1.07-1.08 region, with risks largely two-sided. Wednesday should be the key day, with both eurozone GDP data for Q1 and April’s US CPI data released within the space of 4 hours. Should the data turn more constructive on the eurozone’s growth prospects and support the view that the Fed will be able to cut rates before September, we think EURUSD could have legs to climb back to 1.0850 – a level last reached on April 10th before the last US CPI print. That said, while we think the eurozone data will turn somewhat more constructive, we think risks are tilted to the upside for the US CPI report. Should the data land at 0.4% MoM on an unrounded basis, as per our base case, a further widening in rate spreads should lead EURUSD to break back below 1.07.


Pay data is likely to be the focus this week for sterling traders, not least given last week’s BoE dovishness, with March figures set to be released at 07:00 BST tomorrow morning. Consensus expectations are predicting a fractional decline in both average weekly earnings and weekly earnings ex-bonus. Traders anticipate the former print falling from 5.6% 3m/YoY to 5.5%, while the latter is also seen cooling just 0.1pp, from 6.0% to 5.9%. That said, we think risks to both readings are skewed to the upside given the response by businesses to the April 1st rise in the National Living Wage. Some employers have chosen to deliver this pay rise early, which could see tomorrow’s numbers print modestly hotter than expected. In our view either an in line print or an upside beat on wages should be sterling positive, and more than enough to offset an unwind in the employment readings that should be discounted by markets in any case given the ongoing issues with the Labour Force Survey. Specifically, with only one more wage reading set to be delivered before the June policy meeting after tomorrow, both scenarios would leave the wage readings too hot for the BoE to start cutting rates in June as we see it. This should see markets continuing to price out June rate cut odds that currently stand at just below 60%. If we are right, this means a GBP bounce is in store for early tomorrow morning. Beyond this, a relatively quiet week is in store as far as the UK is concerned, with a speech by BoE Chief Economist Huw Pill, also tomorrow morning, the other key event of note for the week.


The loonie looks set to take a back seat this week, with only a handful of second and third tier data prints due domestically, and no speakers of note scheduled from the BoC. All told, this should leave USDCAD at the mercy of market cross-currents and external events, with developments in the US likely to be the major focus. Chief amongst these are Wednesday’s CPI readings, though we would also note that a whole raft of Fed speakers are due to hit the airwaves, including Chair Powell.  All told, given last week’s move lower for USDCAD from Wednesday onwards on the back of soft US data, we think this leaves plenty of room for a retracement higher if this week’s data meets our expectations and fails to show US disinflation beginning to pick up, with this likely to then be accompanied by yet another round of Fed hawkishness. If we are right, then such an outcome should see USDCAD trading back in the 1.38-1.40 range we see as more reflective of fundamentals for the pair heading into the back end of the week.



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