Written by Convera’s Market Insights team
Dollar knocked by revised Q1 data
George Vessey – Lead FX Strategist
The US dollar benefited from rising Treasury yields mid-way through this week, driven by strong economic data, hawkish talk from Federal Reserve (Fed) policymakers, and a run of weak bond auctions. However, in another sign of investors eager to turn against the US currency, Thursday saw a sharp reversal in the dollar index following downward revisions of Q1 GDP and Q1 core Personal Consumption Expenditures (PCE).
GDP growth for the US was revised lower to 1.3% in Q1, in line with expectations, mainly due to slower consumer spending, whilst PCE prices increased slightly less than initially anticipated. US jobless claims came in slightly higher than forecasts too, and above average for 2024. Market participants now see only one rate reduction by the Fed this year, with odds for a decrease in November at 65% and 83% for December, compared to 61% and 80% respectively prior to the US data dump yesterday. The dollar index fell below 105, erasing the previous day’s gains, and tracking bond yields lower.
It appears like little more than range-trading in currency markets in this low-volatility environment though as investors await more clues from economic data as to when the Fed will commence its easing cycle. The release of the monthly PCE report today – the Fed’s preferred measure of inflation – should steal the show and likely set the next meaningful dollar trend. That trend could be higher if we see a continuation of the first quarter’s renewed inflationary pressures.
In other news, last night Donald Trump has been convicted on all 34 counts of falsifying business records in the historical criminal trial in New York. It is the first time a former or service US president has been convicted of a crime. The verdict comes as he campaigns to defeat Joe Biden in November’s election and return to the White House. He will be sentenced on 11 July – the ex-president could face prison, but legal experts say a fine is the more likely outcome. Nonetheless, Donald Trump can still run in the presidential election in November as the Constitution sets out three main requirements for being eligible to become president – and none of them reference being a convicted criminal. The outcome does however pose a significant political danger for Trump.
Sterling swirls with risk sentiment
George Vessey – Lead FX Strategist
The upbeat risk tone across financial markets at the start of the week saw GBP/USD rally to almost 10-week highs beyond $1.28. GBP/EUR hit its highest level since August 2022 and GBP/JPY near 16-year highs. Sentiment soured though on global inflation fears, sending the risk-sensitive pound reversing sharply against safe haven peers like the dollar, yen and franc. GBP/USD found support around $1.27 though, taking advantage of the weaker dollar post US data.
Looking ahead, the Bank of England’s (BoE) cancellation of public engagements for its policymakers until after the UK general election could been seen as constructive for GBP, as it lessens the already low risk of a BoE rate cut in June. Regarding the election, one narrative around a large Labour majority win, is the potential for closer ties with the EU. This could help narrow the pound’s so-called Brexit risk premium and see GBP/USD trade above $1.30 and GBP/EUR to €1.20. The biggest downside tail risk to sterling is a hung parliament, which saw GBP/USD shed over 2% in a week back in 2010 and 2017.
In the short-term though, economic data, monetary policy and risk sentiment will continue to steer sterling – the latter clear this week and highlighting the pound’s strong correlation with global equities compared to other G10 peers.
Euro bounces back from a 2-week low
Ruta Prieskienyte – Lead FX Strategist
The euro recouped its mid-week losses as the US dollar lost its appeal amid a downward Q1 GDP revision. EUR/USD appreciated close to 0.4% during Thursday’s trading session and is on track to post 1.1% gain over the course of May in a month that typically displays strong negative seasonality effects. EUR/USD is currently trading -1.8% YTD, a marked improvement from mid-April, when the pair was 3.8% down on year-to-date terms.
The fundamental euro backdrop, which for now continues to play a supporting function, continues to improve. The Eurozone economic sentiment indicator for May improved to the highest in 4 months, driven by an improvement in sentiment across the services sector. Consumer confidence displayed marked improvement too, reflecting the smallest extent of pessimism since February 2022, partly driven by slowing inflation and expectations of incoming rate cuts by the ECB. To add to the positive news, the Eurozone unemployment rate hit a fresh record low of 6.4% in April, slightly below market forecasts. Despite that, on the price expectation front, alarm bells are ringing. While selling price expectations declined in services, they increased in industry and construction. Even more worryingly so, consumers increased their views on price trends over the next 12 months to the second-highest level in the past year.
EUR/CHF dropped over 0.7% to a 2-week low, its second largest daily drop in 2024, influenced by a strong Swiss economic growth and a sharp scale back in the near-term rate cut expectations. The swap implied probability of a SNB June rate cut plunged from 49% yesterday to below 33%, the lowest conviction rate since end of November 2023. The ECB is anticipated to cut its key policy rates by 25bps at its meeting on June 6th, which is likely to exert further downward pressure on the euro. Reflecting these expectations, market sentiment, as indicated by the 1-week EUR/USD risk reversal, is at its most bearish in nearly four weeks. However, the 10-delta flies for the same tenor, trading at 0.30 vol, imply that any significant movements in either direction are likely to encounter diminishing interest. This suggests that while volatility is expected, market participants may not sustain substantial directional bets.
CHF surges by over 1% in a week
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: May 27-31
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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.
