News & Analysis


After initially coming under pressure following better than expected PMIs out of Europe, the normally little watched US release triggered a notable extension in the dollar selloff on Tuesday. This was because it provided the first counterpoint to the “strong US growth, hawkish Fed” narrative that markets have aggressively bought into since 23Q4 GDP data came in stronger-than-expected and was compounded by hotter labour market and inflation indicators in 24Q1. Not only did the headline measures show a growth considerably cooling at the start of the second quarter, with the composite measure falling 1.2pts to 50.9, but the details of the report were also soft. Output fell 2.9pts to 51.1 in the manufacturing sector, while the employment indicator fell across both manufacturing (-0.3pts to 51.9) and services (-3.8pts to 47.3), suggesting that the labour market is not as strong as alternative indicators suggest. Moreover, new orders also stumbled, while output price growth slowed. All told, this saw US yields underperform and equities extend gains across the board, fuelling a further rally in cyclical currencies. That said, having broken through key levels in some currency pairs on Tuesday, early trading this morning has seen markets retracing these moves, with major levels failing to hold as attention now turns to tomorrow’s Q1 advance GDP numbers. Significantly, a print of 2.5% QoQ annualised GDP growth expected by markets, which would mark another quarter of impressive growth in the US economy. Moreover, we suspect that risks heading into the release are skewed towards an upside beat, meaning we are still holding on to our tactically bullish dollar view, in spite of yesterday’s price action.


The aussie stands out as the notable riser in this morning’s early trading, coming on the back of Q1 CPI data released overnight that beat expectations. Headline CPI printed at 1.0% QoQ, 0.2pp higher than pre-release expectations, with trimmed mean and weighted median measures also beating consensus forecasts by 0.2pp to print at 1.0% and 1.1% respectively in Q1. With YoY inflation continuing to track above the RBA’s 2-3% inflation target, and underlying price pressures looking rather sticky, this latest round of data confirms that the RBA may lag the pack amongst G10 central banks when it comes to cutting rates. Indeed, similar to the Fed, speculation is now beginning to emerge that the Bank’s next move may be to hike rates. Either way, the prospects of a more hawkish RBA moving forwards has been a 0.4% rally in AUDUSD so far this morning.


Yesterday’s main market event was once again the release of the preliminary European PMIs. For the eurozone as a whole, April’s composite revealed a second consecutive month of expanding activity, while the French and German indices are no longer indicating contraction for the first time in 10 months. Admittedly, this improvement was mainly driven by services activity. Manufacturing activity continued to weaken in April, revealing that the divergence between sectors remains significant and growing across the bloc. Perhaps the central takeaway from the April data, however, is that this divergent trend is also becoming evident in employment and inflation conditions, posing a dilemma for the ECB. Overall, this justifies the reticence of ECB policymakers to give explicit guidance from June onwards, maintaining some opacity on the rate outlook. But markets also seem to be playing wait and see now, with ECB easing expectations little changed post-release, seeing three rate cuts anticipated for 2024.

Despite this, a soft US PMI release later in the afternoon was sufficient to see a 0.5% rally for EURUSD on the day in any case, albeit markets are beginning to unwind that move this morning. How much further this can continue today depends on how ECB speakers choose to interpret these latest PMI figures. Governing Council members Nagel, de Cos and Villeroy are all scheduled to speak, and are likely to provide differentiated readings of yesterday’s data accompanied by diverging views on the future of Eurozone monetary policy from June onwards. This should leave EURUSD trading within its current range in advance of US GDP data published tomorrow.


After trading under notable pressure in recent sessions, a combination of April’s flash PMI release and commentary from BoE Chief Economist saw sterling stage a comeback on Tuesday. Turning first to the flash PMI release, April figures saw a composite reading of 54.0, up from 52.8 in March and significantly exceeding expectations. That said, to us the most significant point was buried in the details of the report. Specifically, while firms noted a sharp increase in costs due to April’s rise in the National Living Wage, there was little evidence that this was being passed on to consumers. In our view, the BoE will need to see this confirmed in the official data in order to start cutting rates, and given the risks of delayed pass through, we think this continues to weigh in favour of an August start to rate cuts in line with our longstanding call for Bank Rate. It also suggests to us that risks to the inflation outlooks remain skewed to the upside for the time being, in contrast to recent comments from the BoE’s Ramsden, warranting a more cautious stance.

We were also somewhat relieved then to hear BoE Chief Economist largely shared our interpretation of recent data based on his comments yesterday. Specifically Pill noted that “we still have a reasonable way to go before I am convinced that the persistent momentum in underlying inflation has stabilised at rates consistent with achievement of the 2 percent inflation target on a sustainable basis,” going on to further suggest that rate cuts are still “some way off”. All told this was sufficient to see traders pare market pricing of a June rate cut back to below 50%, down from the 65% odds seen earlier in the morning. We think this is a move in the right direction, with a continuation of this move set to support sterling upside heading into the May BoE meeting.


Despite gaining 0.3% on the back of soft US PMIs, the loonie was a notable underperformer amongst G10 FX yesterday. This was particularly notable given that both equities and oil prices posted gains, a dynamic that is typically CAD positive, with only NZD, JPY and CHF managing to post weaker performances against the dollar. That said, and as we have previously noted, domestic concerns favour a weaker loonie in our eyes. These are set to come into scope for loonie traders today, with retail sales data and BoC minutes scheduled to be unveiled. All told, we expect both releases to tell a broadly similar story, that is, the Canadian economy continues to struggle under the pressure of high interest rates. Specifically, February’s sales data is expected to show just a 0.1% expansion MoM, a disappointing performance coming on the back of a -0.3% contraction in January. The BoC minutes meanwhile should recognise the struggles of the Canadian economy, and we suspect may be accompanied by an indication that the Governing Council is preparing to cut rates in June in light of this backdrop. All told, with market expectations of a June cut from the BoC standing at just 60% this morning, such a hint would likely see USDCAD retrace higher, meaning risks today look skewed towards a weaker loonie in our eyes.



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