Dollar advances on data and debt drama
Debt ceiling negotiations are set to intensify to try and avert what would be an unprecedented US default with major ramifications for the global economy and financial markets. The safe haven dollar is on the offensive for now, also boosted by solid consumer spending and production data, forcing investors to trim rate-cut bets by the Federal Reserve (Fed).
Retail sales in the US increased 0.4% m/m in April, rebounding from two consecutive months of declines, but well below market forecasts of a 0.8% increase. The advance in April sales suggests low unemployment and steady wage growth are supporting consumer spending away from discretionary purchases to services. Meanwhile, total industrial production rose 0.5% in April, with manufacturing output rising 1%, driven by the largest surge in auto production since October 2021. At the same time, factories are enjoying some relief from stability in supply chains and cheaper commodities. Consequently, expectations for US interest rate cuts any time soon have been dampened, allowing the US dollar to gain ground against most peers with GBP/USD sliding further south of $1.25 and EUR/USD toying with its $1.0850 support. Elsewhere, China’s yuan slid past the key ¥7.0 level in offshore trading for the first time since December as disappointing Chinese economic data this week prompted calls for more policy easing.
We may be looking at a dollar rebound in the short-term, but amidst tighter US credit conditions caused by simmering banking tensions and elevated interest rates, the prospect of Fed rate cuts remains on the table, which strengthens the case for a weaker dollar in the medium to long term.
Strong data to hinder pound from here?
GBP/USD is flirting with a key support level of $1.2450, which marks the double top witnessed in December and January. A break and close below here could open the door to further losses, with $1.2390 – the 50-day moving average – the next target to the downside. The pound’s strong start to 2023, bolstered by surprisingly strong economic data, appears to be running out of steam for now.
The Citi economic surprise index for the UK currently hovers near a 2-year peak, meaning incoming economic data is more positive relative to expectations than at any time since June 2021. This upbeat setting has supported sterling, but amid upwardly revised growth and inflation forecasts, the bar has been raised for continued upside surprises. Simply put, the probability of downside misses is likely to increase, which leaves the pound susceptible to further weakness in the short-term. The likelihood of the Bank of England (BoE) leaving interest rates unchanged next month, or delivering a 13th consecutive hike, will also impact sterling over the coming weeks. After the mixed labour market report yesterday, the next important data set for sterling will be the inflation report a week today. As well as base effects in energy prices, leading indicators, like longer-term inflation expectations, point towards consumer prices heading lower. Markets currently see an approximate one-in-three chance of the BoE keeping rates at 4.5% in June, and a two-in-three chance of a 25-basis point increase.
BoE Governor Andrew Bailey might provide guidance about June rate decision when he speaks at the annual conference of the British Chambers of Commerce today. Meanwhile, against the euro, the pound continues to hover close to its 2023 highs, but a potential reversal pattern on the weekly charts could be confirmed if GBP/EUR ends this week closer towards €1.14.
Weak macro data leaves Euro range bound
With investors’ focus fixated on the US debt ceiling debate, European macro releases have been less market driving. However, the recent deterioration in economic data has put pressure on the euro and might continue to do so in the short-term. Looking at the 6-12 month horizon, the most important question determining the currencies fate will be, if the Fed starts cutting rates as early as markets expect.
The unlikely but worrisome concern over a potential default by the US has left European investors in a state of heightened uncertainty. The ZEW survey showed German financial market experts predicting an unfavorable economic situation over the next six months, with the economic sentiment index falling into negative territory (-10.7 from 4.1). The fall of the headline index follows weaker than expected retail sales and industrial production out of Germany, that has raised the possibility of Europe’s largest economy falling into recession in Q1.
Today’s calendar will only have the release of the final inflation print for the Eurozone (April) ready for investors to digest, with most attention continuing to be placed on US data and the political debate surrounding the debt ceiling. EUR/USD and the European stock benchmark Stoxx 600 are range bound between $1.0850 – $1.09 and 457 – 470 respectively while awaiting new catalysts.
Dollar dominates as GBP/USD slides 1.3%
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: May 15-19
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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.
