Dollar steady but on track for monthly loss
Decreasing macro and bond market volatility has mitigated the initial market fallout of the banking turmoil last month. April has been a sleepy one in comparison, allowing investors to take on more risk, buying equities and selling the safe haven US dollar, supported by a dovish repricing in Federal Reserve (Fed) interest rate expectations.
However, in this current environment in which the Fed dominates markets, any good news could be interpreted as bad news. Although first quarter US GDP growth disappointed from an overall perspective, the robust consumer spending might raise concerns that the Fed will deliver more rate hikes. The US economy grew by an annualized 1.1% in Q1, slowing from a 2.6% expansion in the previous quarter and missing market expectations of a 2% growth. It was the weakest pace of expansion since Q2 2022, but strong consumption growth partially offset a drag from inventories and a slowdown in business investment. Meanwhile, core PCE prices, a preferred inflation metric by the Fed, grew by a hotter-than-expected 4.9% in the quarter, and the headline PCE price index increased by 4.2%, above expectations. This boosted 2-year US Treasury yields to the dollar’s advantage, weighing on both EUR/USD and GBP/USD.
Today’s potentially more decisive round of price data, March core PCE, could determine whether the dollar extends its ascent if sticky inflation forces investors to rethink expectations of Fed rate cuts this year.
Yen slumps after dovish Bank of Japan
At today’s monetary policy meeting, the Bank of Japan (BoJ) stood pat on its ultra-easy monetary policy. The yen is heavily on the backfoot with USD/JPY rising over 1%, GBP/JPY stretching to its highest point since December 2022 and EUR/JPY recording its highest level since 2014.
The BoJ announced it will maintain ultra-low interest rates, as expected, and made no tweaks to its yield curve control. However, the Japanese central bank said it will remove forward guidance that pledges to keep interest rates at current or lower levels. This could be interpreted by markets as a tentative step towards modifying its yield curve control policy. Moreover, data earlier this morning showed core consumer prices in Japan’s capital rose 3.5% in April from a year earlier, beating market forecasts. This is a sign of broadening inflationary stress and keeps the pressure on the BoJ to act in the future.
Still, an end to the BoJ’s negative rate policy has been postponed and the yen will likely remain under selling pressure as other central banks like the Fed, ECB and BoE continue to hike interest rates.
Inflation prints to seal ECB decision?
The euro is on course for its sixth monthly rise in seven against the US dollar, up about 20% from November last year. As well as low volatility and improving global risk sentiment in April, the common currency has been bolstered by bets of more rate hikes by the European Central Bank (ECB) this year. Will the ECB hike by 25 or 50 basis points next week?
Yesterday we saw a consumer confidence indicator in the Eurozone increased to the highest since February 2022 and in line with preliminary estimates, fuelled by improvements in all components. The European Commission’s economic sentiment indicator stabilised in April, although the manufacturing sector continues to struggle. The gauge for selling price expectations among manufacturers decreased to the lowest since January 2021 and inflation expectations continue to ease, suggesting that the peak in underlying inflation may have been reached. This is the first set of important data released ahead of the ECB’s policy announcement next Thursday, whilst individual countries’ inflation figures, worth around 60% of the Eurozone-wide print, will be published today ahead of next week’s overall flash inflation figures. This should provide the market a pretty good clue of whether a 50-basis point hike is likely next week.
Whatever size rate hike delivered by the ECB next week is unlikely to be the last though. This is what’s supporting euro demand. Absent renewed banking-sector stress spilling into Europe, the ECB is expected to hike at least three more times before year-end and to not cut rates until 2024.
Sound pound to score April win
GBP/USD remains within its recent tight trading range of $1.2353-$1.2516 as pound traders appear reluctant to break out in either direction amid hawkish rate and US bank-related uncertainties. Despite the sideways price action, GBP/USD remains nearer its 2023 high and is on track to secure an April rise as expected.
The pound’s typical trend of appreciation in April is attributed to dividend payment season & related repatriation of offshore revenues on the part of FTSE companies, so the monthly gain was largely expected. However, looking ahead to next month, seasonal patterns show that May is often the weakest month for the pound. Since 2010 the average performance of GBP/USD is -1.65% in May. Amidst the current low market volatility, the pound looks like its nearing a tipping point, and failing to hold above $1.25 and printing a new 2023 high could see the currency pair reverse course. A hawkish Fed next week would be a key driver of such a move and a dovish BoE take on interest rates would likely exacerbate a downward shift.
Against the euro, the pound continues to struggle around its 50- and 100-day moving averages located in the lower €1.13 region. Again, monetary policy divergences will be critical for the direction of this currency pair, and despite UK inflation above 10% and better-than-expected economic data, the BoE has been sounding less hawkish than the ECB of late.
Japanese yen crumbles after BoJ
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: Apr 24-28
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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.
