Written by Convera’s Market Insights team
Markets choosing to believe in disinflation
Boris Kovacevic – Global Macro Strategist
The market’s suspicious take on the stronger than expected US PPI print on Tuesday has been proven right in the short term. The US consumer price index surprised the consensus (0.4%) to the downside by 10 basis points in April with the annual headline and core inflation rates falling to 3.4% and 3.6% respectively. The downside surprise reinforced the already underway capital allocation into risk sensitive assets like equities and the euro and pound. US Treasury yields are down across the curve this week with the US dollar on track for a 1% weekly loss.
However, we see this victory lap as investors taking comfort from the fact that US inflation is finally coming down again, after a long string of upside surprises rattled markets in Q1. The report itself can hardly be interpreted as soft as services inflation including and excluding the lagging shelter component remained elevated at 5.2% and 4.9%. Both the annualized and annual growth rates are far away from signalling rate cuts from the Federal Reserve (Fed). That said, after the data release, traders firmed up bets on Fed rate cuts in both September and December, with pricing pointing to a year-end policy rate of 4.75%-5%, down from the current range of 5.25%-5.5%.
To frim up these expectations will be the job of the macro data over the coming months, which is expected to weaken further. We see the potential of a downside surprise to GDP expectations for Q2. We already mentioned last week how the 4.1% Atlanta Fed GDP Nowcast for the second quarter seems too optimistic given the backdrop of softer leading indicators. Since then, the Fed’s estimate has come down to 3.7% due to yesterday’s downside surprise in retail sales. Spending stagnated in April after a solid 07.% and 0.9% gains in the previous month. While not alarming in and of itself, it does seem to suggest that Q2 started on weaker footing.
Pound hits 5-week high after US CPI
George Vessey – Lead FX Strategist
Sterling has surged to a 5-week high of $1.27 against the US dollar, breaking out of a 3-month descending trend channel and on track for its second largest weekly rise (1.3%) of 2024. Demand for pro-cyclical currencies, like the pound, has ballooned because global rate cut bets have been bolstered. Global bonds jumped, thus yields slumped, with both the US and UK 10-year yield falling to fresh 1-month lows, whilst the S&P 500 notched its 23rd record high of 2024 amid elevated global risk appetite.
GBP/USD has breached a key technical retracement level by recovering more than 61.8% of the drop from its 2024 high of $1.29 to low of $1.23. It’s mostly a result of a weakening US dollar and the optimistic global backdrop, but the UK economic outlook has also been brightening, supporting UK assets too. From a technical perspective, the currency pair has reclaimed some key daily and weekly moving averages in a bullish turn of events as well. After the pair closed above its 200-day moving average on Monday, it catapulted through its 50-day and 100-day moving averages in the following two sessions, with bullish eyes now shifting to the 200-week moving average at $1.2860 where it topped out back in March.
Although the sharp uplift hasn’t resulted in the daily Relative Strength Index moving into overbought territory, GBP/USD is peaking above its upper Bollinger Band, which hints at a potential pullback today. Another round of US data is due, but most focus will now shift to UK inflation data next week for clues as to the BoE’s policy path. Should UK CPI come in soft, June BoE cut odds are likely to grow, potentially unravelling some of sterling’s recent gains.
Eurozone on track for a soft landing
Ruta Prieskienyte – FX Strategist
The euro rallied to a 6-week high as markets priced in more aggressive policy easing on the back of the softer US CPI print, boosting demand for pro-cyclical currencies. German bond yields plunged lower across the curve, with the back-end yields on a 10-year benchmark Bunds sliding as much as 11.6bps – the largest daily drop since end of August 2023. The European Stoxx 50 also hit a fresh record level, as markets piled into equities on a confirmation that the common bloc emerged from a recession and a promising of imminent rate cuts.
As expected, the Eurozone economy expanded 0.3% in Q1 2024, recovering from a technical recession recorded at the end of 2023. The report marks the strongest GDP growth since Q3 2022, after suffering a year of stagflation throughout 2023 and even Germany, the continent’s main growth hinderance, managed to expand by more than expected. According to the European Commission’s latest projections, GDP is forecasted to increase by 0.8% this year and 1.4% in 2025 — almost unchanged compared with the winter report, but inflation is now seen as slowing to 2.5% and 2.1% this year and next — down from 2.7% and 2.2% previously. With economic recovery providing the ECB with confidence, money markets marginally increased ECB rate-cut bets as policymakers continued to signal willingness to decouple from the Fed. The ECB’s Villeroy reiterated that the central bank’s policy decisions are less dependent on the Fed than in the past and will hinge on European data after a first interest-rate cut in June. Swaps are currently pricing 24bps of easing next month, 30bps by July and 73bps this year.
The common currency is now on course for its fifth weekly advance – the best performance in 13 months. Short term market sentiment, as measured by the 1-week risk reversal, is most euro bullish so far in 2024, but longer-term measures continue to favour the US dollar. As EUR/USD trades above its key short and long-term moving averages, the pair should pull back from current levels as the momentum meets fading interest. With no domestic releases on today’s docket, US developments once again will set the tone going into the final stretch of the week.
CAD capitalises on Greenback weakness
Ruta Prieskienyte – FX Strategist
The Canadian dollar rallied to a 5-week high, briefly touching $1.3590 before paring some of the gains, as softer US inflation eased market concerns on the timing of Fed’s 2024 rate cuts, leading to US dollar sell off.
The sharp USD/CAD depreciation masked disappointing domestic macro report, which continue to weigh down on the Loonie. Canadian housing starts fell by 0.87% m/m in April, while April Canadian manufacturing sales contracted the most in 5 months, driven by lower food manufacturing.
From a short-term technical perspective, USD/CAD slumped past the 50-day SMA support level but is retesting that level once again as of this morning. The near-term USD/CAD sentiment, as depicted by the 1-week risk reversal, is most dollar bearish since the beginning of April, but demand for long exposure at the back end of the curve remains dollar bullish suggesting position rebalancing is the main drivers of yesterday’s sharp spot movements. Subsequent trend rests on US initial jobless claims report due this morning, which should give a better gauge of recent US labour market trends. Signs of cooling could be followed by further US dollar weakness as markets increasing speculations on Fed rate cuts bets in September and would help CAD clench its second consecutive weekly gain against the Greenback.
Stocks rally to a historic high
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: May 13-17
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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.
