US dollar eyes second weekly rise
Better-than-expected US economic data this week, combined with improving sentiment around several tail risks like US regional banks and the debt ceiling debate, have helped lift the US dollar to multi-month highs against several currency peers. The dollar index is primed for its second weekly rise on the trot, which would mark only its ninth weekly rise of the year.
Regarding the US debt limit, negotiators have sounded much more optimistic about avoiding a US default and underscored their determination to strike a deal soon to raise the government’s $31.4 trillion debt ceiling. This has contributed to a revision of where investors think US interest rates could go in the future. Compared with just a 10% probability last week, money markets are now pricing in a 33% chance that the Federal Reserve (Fed) will hike interest rates once again next month and less rate cuts are now being priced in too. The latest US jobs data this week supported such a shift in expectations as the number of Americans filing for unemployment benefits fell more than forecast, and the four-week moving average, which removes week-to-week volatility, was also slightly down, pointing to a still-tight US labour market.
Economic data is sparse today, but amidst markets hawkish re-pricing of late, Fed Chair Jerome Powell’s speech will be closely monitored before next week’s busy data schedule.

UK consumer mood highest in 15 months
The GfK consumer confidence indicator in the UK rose for the fourth straight month and to the highest in 15 months as British households are becoming more optimistic about the economy and their finances despite stubborn inflation. However, the pound is mostly weaker across the board this morning, although GBP/USD has rebounded from near 4-week lows and GBP/EUR remains atop €1.15.
When UK consumer confidence hit record lows back in September last year, as did GBP/USD, which printed sub-$1.04. Since that bottom, the overall trajectory has been more positive for both consumer morale and for the pound against the dollar, with the latter currently circa 20% higher and 3.3% higher than its 1-year average. Our soft economic data proxy, which includes consumer confidence, economic expectations and business expectations have rebounded in line with GBP/USD, but amidst a stronger US dollar of late, the currency pair has slipped back over 2% from 1-year highs. Meanwhile, Bank of England Governor Andrew Bailey and other policymakers testified to the Treasury Select Committee on quantitative tightening yesterday. They concluded that due to the concern about persistence of inflation in the UK, there is an expectation that the short-term interest rate will be higher, hence the rise in UK gilt yields. For almost all of the previous eight years, UK 10-year gilts had yielded less than US 10-year Treasuries. This divergence in favour of UK gilt yields has also been a key support for sterling in 2023.
Will GBP/USD cling onto its 50-day moving average or will a close below that level, just north of $1.24, induce a deeper slide? Next week brings with it a slew of important macro releases to keep an eye on, including flash PMI prints and the highly anticipated UK inflation report.

Producer inflation hits 25-month low
With most of the 17 scheduled Fed speakers for this week having already made their appearances and without major economic data releases for the Eurozone, FX markets have once again been driven by US centric events. The peak in the monetary policy divergence between the (hawkish) ECB and (dovish) Fed seems to have coincided with EUR/USD reaching a local top just short of $1.11. Now, Fed officials are pushing back against the priced in rate cuts.
While Governing Council members at the European Central Banks (ECB) continue to express concerns over the stickiness of core inflation, most policymakers see the most aggressive tightening cycle in the institutions’ history almost coming to an end. Economists polled by Bloomberg see two additional rate hikes as the base case, while markets currently price in tightening worth 40 basis points. Estonian central bank governor and the ECB’s vice president have both recently pushed back against the idea of rate cuts being expected by investors in early 2024.
German producer prices in the meantime eased for the seventh consecutive month, falling to a 25-month low of 4.1% in April. EUR/USD is set to record its second week of losses and is trading around the $1.0780 level. The next week will have plenty of new catalysts for the currency pair, with the release of German business and consumer confidence and US core inflation coming up.

Yen punished as dollar prospers
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.