Written by Convera’s Market Insights team
US dollar rebounds on renewed hike fears
George Vessey – Lead FX Strategist
The US dollar firmed yesterday despite lower US Treasury yields, as markets assessed mixed signals from US policymakers and economic data on the path for Federal Reserve (Fed) interest rates. Minneapolis Fed President Neel Kashkari suggested the Fed may need to forgo interest rate cuts this year due to stubborn inflation and even hinted once again at a potential rate hike.
After getting carried away at the turn of the year with the likely extent of Fed rate cuts in 2024, markets arguably swung too far in the opposite direction, pricing in as much as a 25% chance of no cuts this year. However, Powell’s dovish presser combined with a softer US jobs report last week, slashed that wager in half . The US economy is still growing at a healthy pace but the latest string of data disappointments from the purchasing manager indicators and small business confidence falling to an 11-year low to job growth starting to moderate have thrown the US exceptionalism theme into question. The US economic surprise index has fallen to its lowest level since the beginning of 2022, which was starting to put light pressure on the dollar. Nevertheless, if inflation continues to accelerate in the US, the belief that the Fed will keep rates higher for longer than its peers will continue supporting the US currency.
Investors now look ahead to further central bank commentary and Friday’s Michigan Consumer Sentiment Index for more clarity on the rates path. The current probability of a rate cut in September is estimated at around 67%.
Pound vulnerable as BoE looms
George Vessey – Lead FX Strategist
GBP/USD snapped a 4-day winning streak and has slipped back below its 200-day moving average and under the psychologically important $1.25 level, as traders await the Bank of England’s (BoE) rate decision on Thursday. The pair slumped yesterday as UK bonds gained sharply once the Gilt market re-opened after the UK bank holiday, with traders adding to wagers on the extent of BoE easing this year.
Demand for UK Gilts is increasing on anticipation the BoE will soon cut interest rates. The long end is outperforming with the 10-year yield falling to its lowest in three weeks, dragging GBP/USD lower. According to swaps, traders see around 55 basis points of cuts through 2024, equivalent to two rate cuts. We still believe that price pressures in the UK are set to fade faster than most assume, opening the way for the BoE to cut rates potentially as early as June and more aggressively overall this year compared to the consensus. However, so long as the global policy easing cycle gathers pace again, sterling downside risk should remain capped, especially against the US dollar.
It could be a different story against the euro though. Indeed, one-month euro-sterling risk reversals reached a fresh 6-month high amid bearish bets on the UK currency. This means more traders are hedging against the risk of the pound depreciating against the euro as opposed to appreciating.
Euro consolidates around 1-month highs
Ruta Prieskienyte – FX Strategist
Scarce market moving macro data saw the euro trading within a tight 30pip range around $1.0770 as financial markets lack direction. Subdued volatility at the start of the week favours the common currency, but EUR/USD snapped a 4-day winning streak, missing out on its best daily run in the past 2 months. The pair appears to be losing its near-term bullish momentum, having been rejected by a strong resistance level at $1.0792 (50-day SMA).
Although nonmarket moving, March retail sales in the Eurozone jumped by 0.8% m/m, above expectations, in what was the sharpest monthly increase in the past 18 months. On yearly terms, the retail sales rose by 0.7%, pointing to the first growth in retail since September 2022. The report signals recovering consumer demand and aligns with other economic data releases pointing to bloc’s economic recovery. Upward macro surprises are especially welcome as the European Central Bank officials are gearing up for an impending June rate cut. ECB’s Hernandez de Cos said that policy rates could be cut in June if the current price path holds but shall not commit to a specific rate path thereon and will remain data-dependent. The remarks were largely shrugged off as central bank policymakers have been paving the way for June rate cuts over the past several months. At the time of writing, the yield on the German 10-year Bund hovered at 2.44%, the lowest in about a month, with the swap implied probability of a June rate cut largely unchanged around 95%.
Across the G10 FX space, the 1-month EUR/GBP risk reversals have reached a fresh 6-month high, topping 0.3% in favour of calls, amid bearish bets against the Sterling ahead of the BoE decision tomorrow. The 1-week equivalent measure also jumped to 0.23% in favour of calls – the biggest increase in 2-weeks amid topside demand. Elsewhere, the Riksbank lowered its key policy rate by 25bps to 3.75%, saying inflation is approaching the target while economic activity is weak. It is the first reduction in borrowing costs since 2016, following the tightening campaign that started two years ago. As a results, EUR/SEK surged by as much as 0.4% while USD/SEK appreciated by 0.6% as the decision was announced.
USD/JPY grinds higher despite the recent BoJ interventions
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: May 6-10
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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.
