Written by Convera’s Market Insights team
Stocks start week in green
George Vessey – Lead FX Strategist
US stocks closed marginally higher yesterday, with the S&P500 extending its biggest weekly gain since November last week, as investors brace for a batch of key earnings reports, a slew of macro data and the Federal Reserve’s (Fed) rate decision. Meanwhile, lingering hopes of a ceasefire between Israel and Hamas helped ease the risk premium on crude oil contracts, with spot Crude oil prices falling over 1%.
Ultimately, the commodity-linked and safe haven US dollar suffered one of its worst days of the month as a result of softening oil prices and improved risk appetite. However, the bulk of the dollar’s losses were against the Japanese yen. Markets have been on edge for weeks for any signs of action from Japan to intervene and help prop up the yen, which has lost 11% against the dollar so far this year mainly due to diverging US-Japanese yields in favour of the buck. When USD/JPY breached ¥160 briefly, the pair suddenly plunged around 500 pips. From a positioning standpoint, Commodity Futures Trading Commission (CFTC) data yesterday showed speculators held the largest net short JPY position since June 2007 in the week ending 23 April 2024. They have increased it in 13 of the 16 weeks this year, and it has almost doubled in size in the last six weeks. This overstretched position and the disorderly move in the yen over the last few days, likely prompted intervention from Japanese officials. The last day of the month today could bring with it some more choppy price action across financial markets amid month-end portfolio rebalancing. Some flow signals point to a stronger dollar today, but with the US currency primed for its fourth monthly rise in a row, it’s best monthly streak since mid-2022, we could see some profit taking and the dollar index slip back towards 105.
Sterling steady despite huge drop in GBP longs
George Vessey – Lead FX Strategist
The British pound scored one of its best weeks of the year last week, rebounding over two cents from 5-month lows versus the US dollar. However, the latest data from the CFTC which covers the week from 16 April to 23 April 2024, revealed a huge drop in net GBP longs (betting on GBP appreciating) in what was the biggest bearish weekly shift since 2007.
While commercial and financial transactions in FX markets represent huge nominal sums, they pale in comparison to amounts based on speculation. Non-commercial traders are not looking to take delivery of a commodity or to hedge costs related to a commodity-related business. Instead, they are taking positions in the market purely to seek a profit from market moves as a speculator. We have reported throughout 2024 of the overcrowded bullish positioning in GBP, which paradoxically limits a currency’s ability to appreciate further. Therefore, although the CFTC data shows traders flipped to net GBP short (betting on the pound depreciating) for the first time November, it also relieves, somewhat, the overstretched conditions which were proving a headwind for sterling bulls.
Indeed, after GBP/USD plumbed a fresh 5-month low just beneath $1.23, near its 100-week moving average, it reversed course sharply and is now trading 2% higher and above the psychologically important $1.25 handle. Domestic drivers are sparse this week, so expect the pound to be driven primarily by risk appetite, the Fed, and most importantly – US data.
Euro weakens ahead of action packed week
Ruta Prieskienyte – FX Strategist
The euro dropped below the $1.07 support level as investors steer on the cautious side given mixed inflation data, along with an unexpected decline in Eurozone economic sentiment. The STOXX 50 closed in the red while the yield on the 10-year German Bund dipped below 2.55%, retreating from a recent five-month peak.
The preliminary report showed that German inflation has stalled at 2.2% y/y in April, although below market consensus (2.3% y/y), as a slowdown in services inflation was offset by a rebound in food prices and a smaller decline in energy costs due to the end of a temporary tax cut on natural gas this month. While the EU-harmonized rate came in higher at 2.4% y/y, the core inflation, excluding volatile items like food and energy, dipped to 3.0% in April, its lowest level since March 2022. Elsewhere in Europe, Spain’s CPI edged to 3.3% y/y, the highest in three months, although slightly below market forecasts of 3.4%. Despite signs that the last mile to 2% is proving sticky, an ECB rate cut at the June meeting appears as a done deal, with money markets prices in an over 90% probability of easing. However, the path thereon remains contested. The recent reacceleration of inflation in the US is raising concerns of inflation spilling over in the common bloc, while the recent increase in oil prices, as well as a weaker euro exchange rate, could very well push the inflation expectations higher due to domestic reasons. The only thing that markets fear more than higher-for-longer regime is a policy mistake. If there is not a clear need to cut, this is one more reason to wait and see.
Today’s domestic calendar is looking action packed. This morning’s German retail sales surprised to the upside, with April figure coming in at 1.8% m/m and above market consensus of 1.3% m/m. Later today, the Eurozone will publish its first estimates for Q1 GDP and April CPI, with the data expected to show a modest acceleration in growth, paired with a slight easing in core inflation. Upside surprises in either would see a pullback in rate cut bets in H2, in support of the euro. Overnight EUR/USD risk reversal skew edged deeper in favour of puts, implying the sentiment going into today’s trading session is for a slight euro decline. As it is month-end, we could see pockets of choppy trading, but less so than on a typical last day of the month with the FOMC meeting looming the following day.
Stocks up close to 1% in a week
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: April 29 – May 3
Have a question? [email protected]
*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.
