G7 currency
pairs remain within their recent trading ranges as the market treads water
ahead of BoJ and Federal Reserve policy meetings next week. The dollar index
has slipped a touch, pushing USDJPY below the psychological 140 area. The
single currency remains offered, with EURUSD remaining in the doldrums
continuing to trade below 1.07. The pair seems fairly comfortable at these
levels with the next level of support coming in at 1.0635 and resistance
sitting at 1.0707 ahead of 1.0780. We have several ECB officials making speeches
later today, and investors will look for further clues ahead of next week’s
policy meeting where a 0.25% hike is expected.
GBPUSD
continues to trade sideways with the pair struggling to breach resistance at
1.2460. Cable shrugged of data this morning which showed that UK house prices
posted their first annual decline since 2012. The mortgage lender, Halifax,
said that average prices fell 1% in May from a year ago, with the reading
following a string of month on month declines last year. The figures back up
last week’s data from the Nationwide Building Society which said that prices
resumed their decline in May.
Elsewhere
the Aussie dollar rose following hawkish comments from the RBA governor Philip
Lowe who said that the recent upside surprises in inflation are testing the
central bank’s patience. A rebounding housing market, strong wage gains and
persistent service price pressure pushed the RBA to surprise markets yesterday
and deliver and interest rate hike for the second straight month.
Friday’s
Non-farm Payroll report posted a solid 339,000 gain against a 195,000 estimate,
boosting the US dollar and increasing the odds of a July rate hike from the
Federal Reserve. Ahead of the report, Fed officials had previously signaled
that they plan to keep interest rates unchanged when they meet this month,
preferring to keep their options open for future meetings, increasing the odds
of a July move. The dollar index rallied, pushing USDJPY through 140 and EURUSD
below 1.07, with GBPUSD consolidating around 1.24.
It is a
fairly quiet week ahead for euro area data releases, with Thursday’s final Q1
GDP release the highlight of the week. We will look to see if the euro area
experienced a winter recession following downward revision to German GDP
meaning that overall euro area growth is also likely to be revised down. A
negative reading would signal a technical recession given that GDP contracted
0.1% in the fourth quarter of last year.
It is a
similarly quiet week for US data as we continue to search for clues on the
outlook for the US economy. May’s ISM Services gauge, which is out later today is
likely to signal continued demand, with respondents positive about business
conditions in the previous month. The trade balance is due to be released
Wednesday and Thursday sees the publication of weekly initial jobless claims.
Have a good
week.
The US Dollar eased 0.2%
ahead of the key May US employment data and after weak factory data suggested a
pause in the Fed’s tightening campaign. USD/JPY remains steady below 139,
failing to cross this level twice. AUD/USD advanced 0.6% to 0.6610 and NZD/USD
gained 0.4% to 0.6096. EUR/USD is moving towards the 1.08 level and GBP/USD
consolidates mid 1.25-1.26.
In the US, the senate
has passed legislation to suspend the US Debt ceiling and to impose restraints on
government spending throughout the 2024 election, avoiding a nation default and
an end to what could have caused a global financial crisis.
Patrick Harper, Fed Bank
of Philadelphia President, stated the US central bank is near the point where
it can stop raising interest rates and hold them on what is a “sufficiently restrictive”
level on efforts to bring inflation back to its target. All eyes will be on today’s payroll data
where hiring is estimated to have slowed to 195,000, and unemployment ticking
up to 3.5% which should support a pause by the Federal Reserve.
Governing Council Member
Villeroy de Galhau argued that remaining hikes by the ECB will be “relatively
marginal” on underlying inflation pressures. ECB’s rapid tightening cycle has
already started to feed through the economy as we could see on inflation data
this week, where eurozone underlying inflation dropped more than expected for
the month of May.
The single
currency remains under pressure against the mighty US dollar, with EURUSD
poised for its biggest monthly drop against the greenback in over a year. A
somewhat more hawkish Fed coupled with moderating growth and slowing inflation
across the euro area has led to a wipeout of all 2023 gains for the pair last
month. EURUSD started the month of May on a 1.10 handle after trading within
touching distance of 1.11 the previous month and finished the month below 1.07,
with many strategists calling the pair even lower going forward. This morning
we eagerly await the release of euro zone inflation data, which is likely to
have resumed its decline, fueled by a drop in energy prices. However, it is
worth noting that we were expecting a similar energy-related drop in the
previous UK CPI print, which did not materialize. Markets will look to today’s
data for clues on the size and timing of possible rate moves from the ECB.
The House
of Representatives passed debt limit legislation to allow the US to borrow more
money just days before the world’s largest economy was expected to run out of
cash and trigger a default. Lawmakers approved the bill yesterday by a vote of
314-117 despite some defections on both sides of the aisle.
The
attention remains in the US this afternoon as markets await the release of
weekly initial jobless claims and the May ADP Private Payrolls report. Analysts
expect a moderate demand for workers as the economy contends with the lagged
impact of higher interest rates. The labor market continues to show signs of
cooling and we will learn even more about the strength of the employment market
with tomorrow’s Non-farm Payroll release for May which is expected to show a
sub 200k print – down from the 253k recorded last month.
Disappointing
economic data from China overnight pushed risk sentiment lower as investors
sold equities and called for additional stimulus measures to boost growth.
Manufacturing purchasing managers’ index fell to 48.8, the lowest level since
December and weaker than the 49.5 reading that markets had predicted. A reading
of less than 50 indicates contraction from the previous month. The data shows that
the recovery has cooled in Q2 after an impressive burst of positive activity
earlier in the year as covid measures were removed. The data further boosted
the US dollar, with both the Australian and New Zealand dollar losing ground, pushing
Aussie below 0.65 to its lowest level since last November and the kiwi to
briefly dip below the psychological 0.6 level.
The greenback
remains resolute against its G10 peers, with USDJPY consolidating around 140
and GBPUSD slipping once again below 1.24. Yesterday’s low in cable of 1.2328
will be the first level of support with 1.2455, the initial resistance level to
watch for. EURUSD remains in the doldrums, once again slipping below 1.07 to
test recent support at 1.0670. The firmer greenback is keeping a lid on the
pair as debt ceiling negotiations improve.
In a busy
end to the week for US data releases, this afternoon we look forward to the JOLTs
job opening report which is likely to show that the labor market continues to
cool as excess labor demand declines. We look for further clues on the strength
of the US economy when the Federal Reserve releases its Beige Book overnight, which
will signal whether the economy and the labor market continue to soften
gradually or whether a more dramatic slowdown is on the cards.
The dollar has been
trading in a narrow range following the UK Bank Holiday and the US Memorial Day
as investors wait for the debt deal agreed over the weekend to be approved by
the congress to avoid a US default. USD/JPY dropped to touch 140 and EUR/USD is
currently at 1.0690, after hovering at the 1.07 level overnight. GBP/USD
continues to trade mid 1.2-1.24.
A debt-pact hearing
will occur today at the US House rules committee, a day before the whole-body
votes on it. Both the White House and GOP congressional leaders are pushing for
the deal to be approved to avoid a US default. US President Joe Biden is
calling lawmakers to support this bill and cabinet members and senior White
house members have called at least 60 house democrats by Monday morning. Both
Biden and Republican House Speaker McCarthy seem confident that they will
gather the necessary votes for the deal to go through.
Prices in UK stores
rose about 9% YoY in May, according to the British Retail Consortium. This is
mainly driven by lower energy and commodity costs which helped bring prices
lower for staples like butter, milk, fruit, and fish. Although UK inflation is
losing some steam, ticking slightly higher from the 8.8% increase in April, we
are still running on new record high inflation numbers.
The dollar has lost steam
as the Republican and White house negotiators are getting closer to an
agreement to raise the debt limit and cap federal spending for the next two
years. Bloomberg Dollar Spot Index is lower 0.1% but remains on a 0.8% weekly
gain. EUR/USD remains above 1.07 and GBP/USD currently ticking higher after UK
retail sales pick up more than expected for the month of April. USD/JPY is back
under 140.
Another quarter point
interest rate hike by the Federal Reserve is priced in by traders as US yields
rose, with the 2-year yield rising to 4.53%, the highest level since March where
US bank failures spooked markets and triggered purchases of government debt. This
current move can be explained, once again, by a recession risk with markets
concerned about persistent inflation, tight labour market conditions and surprising
economic data that can force the Fed to do a sharp reversal.
UK retail sales remain
in the threatening zone despite the positive number for April, where volumes rose
to 0.5%, above the 0.3% expected by economists. Government support for household
energy bills in the second quarter of the year, as well as the easing in energy
prices can explain the increase in spending in April. We keep expecting
spending to remain under pressure, especially as incomes are getting squeezed
by higher food prices. Wages are rising but not as quickly as goods and services
prices, leaving households with less money in their pocket.
The BOE’s monetary
policy campaign is already in restrictive territory and sticky inflation should
keep the central bank on its toes and continue its hiking cycle into the
summer. Interest rates are expected to increase by a further 25 basis points to
4.75% in June.
The US Dollar
continued to advance overnight against all major peers as Fitch Ratings
announced it could downgrade US’s AAA credit rating, reflecting the political
tensions that are preventing a deal to neutralize the country’s debt-ceiling
crisis.
The Bloomberg Spot
Index has touched the highest level since the 20th of March and
USD/JPY is on its way to 140. EUR/USD continues to underperform for the third
consecutive day, trading mid 1.07-1.08. GBP/USD follows the trend and declines
for the fourth day in a row, struggling to keep above 1.24.
The drop in the UK’s
CPI inflation in April was not what the Bank of England wanted to see and
another 25-basis points rate hike is back on the cards. Inflation in the UK
proves to remain sticky, with food inflation as a great contributor, only
dropping to 19.3% from the previous 19.6%. Core inflation came as a surprise
too, rising to 6.8% from 6.2% in March. We are expecting inflation to drop
through the summer, which should support a pause by the BOE later in August.
The main risk is that interest rates will have to tick above 5% to tame
inflation, which will have an impact on UK’s economic development and credit
conditions.
Last night’s FOMC
minutes release showed that officials are split on more rate hikes, and cuts
are still unlikely, suggesting an ongoing data-dependent approach by the
Federal Reserve. The minutes showed that the Fed remains worried about
inflation, which is no surprise as several officials have stressed the
importance of the fight against inflation throughout the month. Across the
board, the minutes matched market expectations but traders remain alert for new
debt-ceiling headlines and developments.
Data
released this morning showed that the UK Consumer Price Index fell to 8.7% in
April from 10.1% the previous month, breaking a seven-month spell of double-digit
inflation. The print marks the biggest drop in the annual inflation rate in
three decades, however the decline still showed the third consecutive month
where the release came in above expectations. Core inflation and the RPI also surprised
to the upside, and in a further worry for the BoE, the print includes a large
negative base effect from household energy prices where annual growth dropped
sharply. Core inflation, which strips out volatile food and energy prices,
unexpectedly accelerated to 6.8% which is the highest since the early 1990’s
and up from 6.2% in March.
The figures
are likely to fuel expectations that the MPC will further extend its cycle of
interest rate hikes in the coming months in an attempt to quash rampant price
pressures. The UK has the highest level of inflation in the G7 nations and Prime
Minister Rishi Sunak has pledged to cut inflation in half this year, although
today’s print along with upside surprises over the past few months put further
pressure on his comments.
The pound
posted small gains after the data release, with GBPUSD jumping about 30 pips,
but the rally appears to have run out of steam with the pair bumping into
offers at 1.2450. Short-term interest rate markets have been active this
morning, pricing big moves into the next four MPC meetings and suggesting a
terminal rate of 5.4%, although this may be overdone, driven by positioning and
lack of liquidity in early trading.
Elsewhere,
the New Zealand dollar slumped this morning after the RBNZ delivered a 0.25%
interest rate as expected and signaled that this may be the peak in rates.
*The arrows indicate how the base currency performed against the counter currency overnight. This document is for information purposes only and does not constitute any recommendation or solicitation to any person to enter into any transaction or adopt any trading strategy, nor does it constitute any prediction of likely future movements in exchange rates or prices or any representation that any such future movements will not exceed those shown on any illustration. All exchange rates and figures appearing are for illustrative purposes only. You are advised to make your own independent judgment with respect to any matter contained herein.