Written by Convera’s Market Insights team
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Dollar tumbles as US service sector cools
Boris Kovacevic – Global Macro Strategist
Although the Federal Reserve (Fed) holds a more-hawkish line, the US dollar is struggling to build on recent gains and has sharply reversed course from 5-month highs. The Fed’s willingness to delay cuts is becoming fully priced in by markets and with US data not strong enough to have the Fed revert to a hiking stance, dollar upside could be contained from here. Meanwhile, softer US data could see the dollar react more negatively, as witnessed yesterday after US services data, plus seasonals favour more dollar weakness in the month of April.
After the US services PMI reading fell to a 3-month low the dollar index extended its decline, recording its worst 2-day drop in a month. Although the week began with an upside surprise in the US manufacturing PMI that saw the inflation sub-component rise to the highest level in one-and-a-half years, this reflationary data point was not echoed by the services sector. Instead, the services sector recorded its weakest price growth in four years in March. Employment remained in negative territory, despite rising slightly, so the main focus shifted on to falling price pressures, supplier deliveries and backlogs. The report could already be outdated though, as the rise in commodity prices continues to push inflation expectations and input costs higher.
All eyes are now on the non-farm payrolls report to close out the week on Friday. Indeed, investors are preparing for potentially choppy price action. FX options implied volatility gauges realised volatility risk and expiries that include Friday’s US jobs report and next Wednesday’s US inflation print reflect a greater perceived risk of increased FX volatility.
USD/CAD under selling pressure amid weaker Greenback
Ruta Prieskienyte – FX Strategist
As of early Thursday European trading hours, the Canadian dollar strengthened towards $1.3500 level per US dollar, approaching a 2-week high as the Greenback stumbled on the back of disappointing services sector data.
Earlier this week USD/CAD tested a 4-month high, nudging at the barrier of $1.3600, driven by an overwhelmingly robust US economic data, namely strong US manufacturing PMI data, while Canadian indicators continue to lag. As, the US ISM Manufacturing index exceeded 50 in March for the first time since October 2022, domestically, Canada’s S&P Manufacturing PMI remained relatively stable in March, marking the eleventh consecutive month of contraction in sector activity.
For now, the Canadian dollar is hovering at a strong resistance level of $1.3500 (200-day SMA). and without help from US data in a form of weaker labour market report due shortly, USD/CAD might struggle to fall below the key psychological barrier. Looking ahead, on average we tend to see the Canadian dollar appreciate over the course of April, as indicated by our daily chart below.
Euro rallies above key moving average
Ruta Prieskienyte – FX Strategist
The euro bounced back from a 7-week low, reclaiming the $1.08 handle, as the US dollar stumbled against major currencies influenced by disappointing services sector data. Earlier in the session, EUR/USD was under pressure after cooler than expected flash CPI prints, while European shares closed in on multi-decade highs from last week.
As pre-empted in yesterday’s post, the preliminary Eurozone inflation report declined by more than market consensus, falling to 2.4% y/y in March and matching November’s 28-month low. The core rate, excluding volatile food and energy prices, also cooled to 2.9% y/y, reaching its lowest point in over 2-years. The decline was driven by the goods sector inflation, namely a decline in energy and a continued moderations in food prices, while the services component remained sticky at 4.0% y/y. Although the overall drop is encouraging news for the ECB, it does not change the fact that the bank is unlikely to cut rates during its meeting next week. The labour market remains hot, with unemployment, also released today, staying at 6.5%, an all-time low since the start of the Eurozone in 1999. Wage growth has started to cautiously retreat but remains elevated, and a tight labour market could add to that. The ECB is likely to prepare the markets for a shift in monetary policy in June and we could see some dovish signals at next week’s meeting, which might weigh on the euro from an already vulnerable position.
Despite the released statistics on the Eurozone and Powell’s remarks, FX volatility remains extremely low, with 1-month EUR/USD realised volatility at 4.54% (Yang-Zhang basis, annualised), near 29-month lows. The pair has closed in the $1.07-$1.10 trading range for the past 67 trading days and counting. For now, there is nothing to suggest that this regime is going to change any time soon. There is scope for further EUR/USD upside now that the pair closed above its key 200-day SMA, however, an upward surprise in US jobs data later today could sure enough erase the recent euro gains and submerge EUR/USD below $1.0800 yet again.
Pound capitalises on dollar weakness
George Vessey – Lead FX Strategist
Sterling’s fall from $1.28 to around $1.25 against the US dollar over the last few weeks saw it break below some key moving average support levels, exposing greater downside risk. But after yesterday’s US data and dollar weakness sterling was able extend its rebound from 7-week lows to move back above the 200-day moving average – a bullish turn of events.
The reaction to the upcoming US jobs report could be critical in determining whether the currency pair moves back into the higher realms of its narrow year-to-date range or breaks towards fresh lows. Fundamentally, it could be that investors have come to terms with the high-for-longer Fed narrative now that less than three rate cuts are being priced in. Therefore, assuming US data doesn’t significantly surprise to the upside, further dollar gains may be more elusive, thus limiting the downside risk for GBP/USD. Reminder – on average, GBP/USD has risen by over 1% in the month of April over the past two decades.
Meanwhile, stretched GBP positioning is easing. Currency speculators have been bullish on sterling since early December, but the latest data from CFTC showed the net GBP long position fell to 35,170 contracts in the week to March 26 – around half the size recorded a fortnight earlier.
Dollar drops to 1-week low
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: April 1-5
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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.
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