Written by Convera’s Market Insights team
Non-US events driving the dollar
Boris Kovacevic – Global Macro Strategist
G10 central banks have made a large step towards joining the monetary policy easing cycle that their peers in emerging markets kickstarted last year. The share of central banks cutting interest rates is rising by the week and communication from the big three is becoming more dovish by the meeting. The Swiss National Bank marked the beginning as the first G10 institution to cut interest rates last week, while the Federal Reserve (Fed) and Bank of England (BoE) failed to deliver hawkish messages to markets. Investors have welcomed the lack of pushback with open arms and feel reassured in their hopes that the peak of the global tightening cycle is behind us.
While this development does play into our global macro thesis of monetary policy having to turn more accommodative, it is important to not lose sight of the currently discounted macro and inflation risks. The US is the most at risk of inflation settling above 2% as the incoming macro data continues to remain robust. Last week saw five economic data releases in the US surprise to the upside. Inflation expectations are on the rise as well, showing how narrow the Fed’s path seems to be. Hard- and soft-landing, while on opposite ends of the forecasting spectrum, do seem to be separated by just one or two miscalculations by the Fed.
The US dollar has been supported by central banks other than the Fed preparing markets for incoming rate cuts this year. The Greenback rose for the second consecutive week and has been able to appreciate against every G10 currency. Going into this week, the data dependence of central banks and the ambiguity of the future policy easing path are making the macro data invaluable in gauging where markets are headed. However, while a lot of economic data is scheduled to be released this week, most of the prints lack the ability to move markets. The only potential catalyst will be the PCE report (Fed’s preferred inflation measure) on Friday.
Gearing up for June cut
George Vessey – Lead FX Strategist
We’ve noted over recent weeks that risks to the pound lean asymmetrically to the downside in the short term given the relatively hawkish BoE policy pricing and stretched positioning. Hence, the dovish BoE twist and weaker UK data dump last week triggered a sterling selling spree. The UK currency has appreciated against less than half of its global peers so far this month and the past week has seen it appreciate against just 14%.
The BoE held its key rate unchanged at 5.25% as expected, but the pound’s weakness gained momentum because two policymakers switched from hawkish to neutral. Although markets are pricing June as the most likely month for the BoE’s first rate cut, the dovish voting split saw the probability of a rate cut as soon as May being priced in by markets. As a result, the UK-US 2-year yield spread dropped to its lowest level in a year as GBP/USD suffered its worst day since October, while GBP/EUR slipped to a 9-week low, and GBP/JPY pulled back sharply from 9-year highs. On the data front, a bigger-than-expected drop in UK inflation last month, coupled with stagnant consumer spending and an overall easing in economic activity also supported the BoE’s dovish guidance that rate cuts are in play this year.
GBP/USD has now declined over 2% from its 7-month high just shy of $1.29 two weeks ago. The currency pair continues to float in a circa 3-cent range between key moving averages. In fact, the interquartile trading range throughout Q1 has remained remarkably tight, with GBP/USD spending 50% of its time oscillating in the $1.26330 – $1.2727 range. An extended break to the downside looks plausible if the pair closes below its 50-week moving average currently located at $1.2575.
Euro testing key support area
George Vessey – Lead FX Strategist
The euro slumped to its lowest level since the start of the month against the US dollar following a week of central bank decisions and key data releases. EUR/USD has fallen about 1.4% over the past two weeks and short-term risks appear to be tilted to the downside though EUR/GBP upside risks are rising having clocked a fresh 9-week high. It’s a light week in terms of economic data this week so we don’t expect a major reversal of last week’s trends before the upcoming Easter break.
Reasons for higher European Central Bank (ECB) policy rates beyond June are diminishing with the latest CPI and wage growth reports surprising to the downside. As the Governing Council continues to turn more dovish, money markets are now pricing in 92 basis points of ECB cuts this year, with the probability of a June rate cut at 76% at present. In the near-term, EUR/USD faces a strong resistance barrier at the $1.09500 – a level above which it has only been able to sustain for 8.2% of the time during 2024. In fact, the interquartile trading range throughout Q1 has remained remarkably tight, with the pair spending 50% of its time oscillating in the $1.08165 – $1.09225 range. Without a meaningfully large shift in monetary policy expectations for either the Fed or the ECB, volatility in EUR/USD is likely to remain depressed. We do, however, expect EUR/USD volatility to pick up around data events such as; wage growth, labour productivity and corporate margin, because the ECB’s President Lagarde highlighted those as the three key criteria going forward for ECB rate cuts.
Last week, the ZEW Indicator of Economic Sentiment for Germany reached its highest level since February 2022, but was shrugged off by FX markets as investors are now looking for a larger bone to chew on. This week, economic business sentiment and final consumer confidence data for the Eurozone will be published alongside flash inflation prints from multiple European countries and retail sales, and the unemployment rate for Germany.
CHF and JPY biggest losers as key funding currencies
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: March 25-29
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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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