Written by Convera’s Market Insights team
Weak Chinese yuan helps dollar
George Vessey – Lead FX Strategist
The US dollar came under pressure earlier this week as softer-than-expected US retail sales data bolstered bets that the Federal Reserve will have to cut interest rates as soon as September, with about two rate reductions seen this year. The dollar has firmed since then though, with news overnight that the offshore Chinese yuan has fallen to a new 2024 low against the US currency after the weakest People’s Bank of Chaina’s (PBoC) fixing since November.
The PBoC also left key lending rates unchanged at the June fixing, aligning with market expectations, whilst the benchmark 1-year loan prime rate was maintained at 3.45%. Meanwhile, the 5-year rate, a reference for property mortgages, was retained at 3.95% following a record cut of 25 basis points in February. Both rates sit at record lows amid the fragile economic recovery that reinforces calls for more support measures from Beijing. One reason for the lack of further stimulus is the stronger US dollar, which continues to challenge Chinese officials. If there is no serious pushback to support the renminbi when onshore trading gets going though, traders will push the dollar-yuan exchange rate into a higher range.
The data calendar in the US is not very heavy today or tomorrow, so the slew of central bank meetings elsewhere – the highlights being in Switzerland and the UK – will be the key focus today. That said, the US dollar should keep finding some support against European pro-cyclical currencies ahead amidst the ongoing political angst across Europe in the build up to the French and UK elections.
Will the BoE signal a summer cut?
George Vessey – Lead FX Strategist
Chunky overshoots for UK services inflation in April and May ended any hopes of a June interest rate cut. Still, we expect the Bank of England (BoE) to stick to its message that rate cuts are coming soon if data fall roughly in line with its forecasts. Sterling found some support after the inflation report yesterday, reclaiming the $1.27 handle versus the US dollar and holding firm above €1.18 against the euro. We don’t anticipate much BoE-driven volatility today unless the bank catches markets off guard.
Money markets have slightly pared bets on BoE interest-rate cuts this year despite headline CPI falling back to the 2% target for the first time since the spring of 2021. This is because the BoE’s important service inflation measure came in higher than forecast at 5.7% vs. 5.5%. This, along with election-related near-term economic uncertainty, is likely to keep the UK central bank on hold today, but we’re sticking to our call for the first rate cut to come in August. With markets only pricing a one in three chance of this happening, this leaves sterling vulnerable. If we see a surprisingly more dovish vote split amongst BoE policymakers, there is scope for repricing in a GBP-negative direction. Relatively high yields within the G10 space have helped sterling this year though, and it could be argued that any BoE-driven sterling downside might prove short-lived if communication and policy moves by other central banks are similar.
The commentary on what the BoE make of the latest data in today’s meeting minutes will be particularly important because we haven’t heard from anyone at the bank since it cancelled all communication when the UK election was called last month.
Euro stable around $1.0750
Ruta Prieskienyte – Lead FX Strategist
The euro is trading sideways near the $1.0750 handle amid a lack of market moving events and thin trading thanks to a US federal holiday yesterday. As investors continue to look for fresh cues on the Fed and the ECB interest-rate outlook, the European Central Bank (ECB) remains concerned over stubborn service inflation. The ECB’s Centeno noted that the central bank will feel comfortable easing monetary policy further as long as inflation continues to moderate. Additionally, the Netherlands’ Knot highlighted that the decision will be more heavily based on data rather than expectations.
Yesterday’s bare domestic calendar created few trading opportunities, which was reflected in largely muted realised volatility among most euro G10 crosses. The German 10-year breakeven inflation rate, a gauge of market-implied inflation expectations, fell 1 basis point to 2.036%, and the current account surplus in the Eurozone widened sharply to €34.4 billion in April 2024 on a yearly basis. Perhaps more interestingly, France and Italy, along with five other peers, were reprimanded by the European Union for running budget deficits above the bloc’s 3% limit, leaving them subject to the bloc’s so-called Excessive Deficit Procedure, which requires remedial action and can lead to fines for noncompliance. The announcement is even more consequential with French legislative elections looming, which have recently rattled investors. FR-DE 10-year yield spreads remained close to multi-year highs above 78 basis points, and France’s Finance Ministry estimates that if such a higher borrowing cost persisted for a year, it would set the state back around an additional €800 million ($859 million).
With today’s domestic calendar largely empty, EUR movements will be largely determined by political and foreign developments. The SNB meeting caused a stir in the FX markets as the central bank lowered borrowing costs at a second straight meeting, bringing the policy rates down to 1.25%, keeping it at the forefront of global interest-rate cuts as it battles low inflation and a strengthening franc. CHF reverses gains against the euro and the US dollar as EUR/CHF and USD/CHF rally by 0.6% and 0.8% respectively.
Swiss franc weakens as SNB cuts rates
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: June 17-21
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
