Written by Convera’s Market Insights team
Dollar consolidates near 6-month highs
George Vessey – Lead FX Strategist
After a big pickup in volatility across financial markets last week, this week has started on a calmer note. Cooling tensions in the Middle East helped support global risk appetite, with the S&P 500 index breaking a 6-session decline, a rare patch of sustained weakness for equities. Dampened demand for safe haven assets saw gold prices drop to 3-week lows and the US dollar index clocked a modest down day, though remains firmly above the 106 handle, near 6-month highs.
It’s hard to bet against the US dollar right now though. It benefits from its high yielding (higher for longer US interest rates) and high growth (strong US economy) status. It also benefits from being a safe haven currency (appreciating when investors seek refuge in times of political or financial turmoil) and even a commodity-linked currency (now that the US is a net exporter of energy). Hence, it’s no wonder the 5% rise of the US dollar this year has coincided with traders flipping from betting $10 billion against the buck in January, to a wager in excess of $29 billion that the US currency will appreciate further in April. The larger the bullish bets become though, the greater their restraint, meaning the upside for the dollar might be limited. This is especially true given the extent of the hawkish repricing that’s already taken place, with markets now expecting less than two rate cuts by year-end as opposed to more than six at the start of the 2024.
On the data front, the S&Ps global flash Purchasing Managers Index figures will be released. Recent manufacturing indicators have been positive, particularly in the US, so investors are looking for signs of improvement outside the US to keep the dollar’s strength in check.
Dovish BoE rate outlook punishes pound
George Vessey – Lead FX Strategist
As we signalled might happen, GBP/USD fell to $1.23 yesterday, hitting a new 23-week low just shy of the 100-week moving average. Despite global equities starting the week on a firmer footing and oil prices falling, the pound came under selling pressure across the board as investors continued to process the dovish comments by Bank of England (BoE) policymaker Dave Ramsden on inflation and and the monetary policy outlook.
The increase in dovish cooing by BoE rate-setters of late has led investors to raise the probability of an earlier BoE rate cut and more cuts in total this year. Markets are now fully pricing two quarter-point rate cuts and a more than 25% chance of a third by year-end, with the first move coming in June as opposed to August. Arguably the realignment of market pricing has further to run, especially if this dovish chorus gains more voices when the BoE’s chief economist Huw Pill (dove) hits the wires today. Headline CPI in the UK is now below the US for the first time in two years, again increasing the likelihood of the BoE cutting rates earlier than the Fed this year. Hence, UK two-year yields have fallen 20 basis points from around 4.5% since last Wednesday’s UK inflation report, whilst US yields have consolidated at 6-month highs around 5%. This is one of several factors weighing heavily on GBP/USD.
Market pricing for BoE cuts might converge more towards that of the ECB, which also increases the downside risk for GBP/EUR. The pair fell to the lowest level since the start of January yesterday, taking out its key 200-day moving average support in the process. Today, the main risk event for sterling is the release of flash business activity surveys for April. All three sectors reported rising activity for the first time since June 2022 last month, and a continuation of this trend will be required to provide the pound some much-needed support.
Euro gains on German PMI surprise
Ruta Prieskienyte – FX Strategist
The euro got an early boost as German composite PMIs surprised to the upside, indicating expansion for the first time in June 2023. EUR/USD appreciated to $1.0695, but the gains have since decayed as investors attention turns to US flash PMIs due later today. European STOXX 50 advanced 0.3% as last week’s geopolitical tensions subsided while the yield on the 10-year German Bund consolidated above the 2.5% threshold, reaching its highest level since November 27.
Earlier in the session the euro was under mild selling pressure as a preliminary sentiment missed expectations. Consumer confidence across the bloc remained broadly stable at -14.7 in April 2024, below consensus of -14.0. Regardless, this was the highest level of sentiment seen since February 2022, suggesting a positive outlook fuelled by hopes of upcoming ECB interest rate reductions. The ECB officials are converging on their June 6 rate decision as the moment to start lowering borrowing costs. The Bank of France governor Villeroy has been a vocal supporter of such a move, while his more hawkish colleagues have expressed varying levels of conviction. In the latest interview, he said that the central bank shall not be swayed from a first interest-rate cut in June by the recent oil price uncertainty, adding that “unless there is a surprise, we must not wait too much.” The money market implied probability of a 25bps cut in June remains around 87% with 78bps of cuts priced in by year-end.
As markets calm at the start of the week, euro’s short term bearish pressure eases a notch. Across FX options, EUR/USD 1-week implied vol slides to a three-week low of 5.53% while 1-year EUR/USD 25D risk reversal pulled back to 1.11% after reaching a near six-month high last week. However, diverging interest rate expectations between the Fed and the ECB remains an overarching euro negative factor. While not our base case, traders have upped their bets that EUR/USD could fall back down to parity, with markets now pricing in a more than 10% chance of such a scenario unfolding within the next six months, compared close to zero probability at the start of the year. The euro has already slipped 3.5% against the US dollar since the start of January and parity would require a further drop of around 650 pips, or 6.5%.
Gold loses its shine
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: April 22-26
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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.
