Written by Convera’s Market Insights team
US business activity cools
George Vessey – Lead FX Strategist
Markets have pushed back slightly against the policy divergence view that has catapulted the US dollar higher this year. Although there is plenty of evidence that the US economy continues to outperform its global peers, S&P Global’s business activity data, released yesterday, saw US activity expanded in April at the slowest pace in four months. Money markets shifted back toward the probability of two quarter-point rate cuts by the Federal Reserve (Fed) this year, sending US yields and the US dollar broadly lower.
The flash composite Purchasing Managers Index (PMI) which tracks the manufacturing and services sectors, slipped to 50.9. A reading above 50 still indicates expansion in the private sector, but it was its slowest since December 2023, implying the US economy may not be as “exceptional” as other indicators suggest. The composite measure of orders also showed the first contraction in six months whilst employment decreased for the first time since June 2020 with the reduction focused on services. A cooling of the labour market fed through to lower prices pressures too, with both input costs and output charges rising at slower rates. As the US dollar continues to nurse its wounds today, traders look ahead to Thursday’s US GDP report and Friday’s March data on the Fed’s preferred inflation gauge – the PCE deflator. If the data comes in below estimates, the dollar is likely to weaken further.
Although the US dollar index dropped over 0.4% yesterday, its second biggest daily fall of the month so far, USD/JPY remains close to 34-year highs, with the threat of Japanese intervention ramping up, which would shake up FX markets. Elsewhere, oil prices remain at more than a 3-week low as geopolitical risks cool and supply concerns ease, whilst gold prices are down 1.6% this week and the S&P 500 is up 1.3% as global risk appetite improves.
Sterling registers best day of 2024
George Vessey – Lead FX Strategist
According to flash PMI data released yesterday, the UK economy’s recovery from recession unexpectedly gained momentum at the start of the second quarter. The data preceded the Bank of England’s (BoE) chief economist, Huw Pill’s, relatively hawkish comments about monetary policy. These factors, combined with weaker US PMIs, saw GBP/USD score its biggest daily rise (0.8%) year-to-date and GBP/EUR reclaim its 200-day moving average above €1.16.
Falling inflation and the subsequent strong rebound in consumer real disposable income is boosting UK growth. The UK composite PMI rose to a stronger-than-expected 54.0 in April, from 52.8 in March. This marked the most robust growth in business activity since May 2023 and means the UK has outperformed even the US every month so far this year. The gain was led by a big rise in the services index to 54.9 from 53.1, offsetting the manufacturing slump to 49.1 from 50.9. Meanwhile, the prices charged by firms rose at the slowest pace in over three years, but they also reported the strongest cost pressures in 11 months, particularly from staff wages after the 9.8% minimum wage hike that took effect in April. This could raise concerns that the battle to curb inflation pressures is not over, despite the headline rate close to falling to the 2% target. Indeed, Mr Pill stated that even with inflation falling towards target, there were greater risks from cutting too quickly, rather than too late.
Accordingly, money markets modestly reduced bets on the scope for BoE rate cuts and August is no longer fully priced in as the starting point. Two quarter-point cuts are still expected by year-end though, with small odds of a third. The UK 10-year government bond yield surged towards 5-month peaks as result, supporting sterling strength across the board. GBP/USD has recovered well over a cent from Monday’s 5-month low around $1.23, though it’s still caught in a downtrend channel that’s been in place since mid-March.
Euro rallies to $1.07 following bearish US PMIs
Ruta Prieskienyte – FX Strategist
The euro rallied to a 1 ½ week high after a disappointing miss on flash US PMI data, weakening the US dollar. US dollar’s asymmetric reaction function to US macro data remains the dominant driver. Although EUR/USD gained 0.4% as German PMIs surprised to the upside, the reaction was weaker in both the magnitude and the duration as the pair’s gains fully decayed to the open rate in as few as three trading hours. Therefore, EUR/USD remains more sensitive to US macro developments, but at least the domestic macro no longer poses a burden on its FX performance.
The S&P Global composite PMI for the Eurozone climbed to 51.4 in April, topping market consensus of 50.7. German private-sector activity grew for the first time in 10 months, driven by services as manufacturing continued to shrink, albeit at a slower pace than the month before. The overall performance was also better in France, where activity remained broadly stable after contracting for 10 months. However, the recent improvement in sentiment has been driven by the expectations component as export perspectives brighten on hopes of central bank rate cuts. The subcomponents showed that service sector companies raised their prices at a faster rate than in March, fueling expectations that services inflation will persist. Moreover, accelerated increases in input costs were likely driven not only by higher oil prices but also, more concerningly, by higher wages. This could be a potential source of concern for the ECB officials who are gearing up for a first interest-rate cut in June. While we do not think the latest print could derail the ECB’s plan to ease in June, it may prompt a more cautious approach from there on. For now, money markets hold ECB rate bets broadly stable, pricing 22 basis points of cuts by June and 79 basis points by year-end.
Markets will now turn attention to the Ifo survey due shortly this morning. If in line with the rest of the leading indicators, an upward surprise could give the euro a gently nudge it needs to sustainably trade above the $1.07 handle. However, a bullish print on US durable goods order would erase the hard-earned gains. The options markets are positioned for another volatile day with EUR/USD overnight implied options volatility trading at a near 1-week high.
Risk assets are rebounding this week
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: April 22-26
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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.
