After just one quiet week, market volatility re-emerged. This time, the macro consideration isn’t financial instability, but instead recession risk in the US after numerous survey measures exposed weaknesses in the growth outlook. With some of the data points pre-dating the collapse of SVB and the subsequent tightening of credit conditions, the signs aren’t great for those pinning their hopes on a soft landing for the US economy. Over the course of the week, pricing of a recession has soared, while markets are now betting the likeliest course of action from the Fed is rate cuts. initially this corresponded with a broad sell-off in the dollar and a slight bid in equities, but as the concerns mounted further, the dollar began to feel the positive effects of a haven bid. Now the emphasis rests on whether these same signs are visible within the hard data, starting with tomorrow’s nonfarm payrolls.
Next week’s main event will come in the form of the US inflation readings for March on Wednesday. With markets increasingly positioning for a US recession, a weak reading will increase the pressure for the Federal reserve to call a halt to their hiking cycle and potentially even pivot to rate cuts. At a central bank under slightly less pressure, the Bank of Canada rate decision is due just 90 minutes later, where rates are expected to remain at 4.50%. Elsewhere, a collection of preliminary inflation and wage data is due, but with no other large developed economies on the release list, and a short week following the Easter break, market action and liquidity may well be limited. The lack of alternative distractions means all eyes will be focused on the US drivers of dollar pairs. A surprise in next week’s CPI print could therefore be explosive for markets, providing a catalyst for some currencies to break out of recent trading ranges.
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Simon Harvey, Head of FX Analysis
Jay Zhao-Murray, FX Market Analyst
María Marcos, FX Market Analyst
Nick Rees, FX Market Analyst