Written by Convera’s Market Insights team
Dollar slides into holiday-shortened week
George Vessey – Lead FX Strategist
After a huge week of central bank focus, the new trading week started on a mixed tone. Stocks in the US slipped whilst Bitcoin gained as much 7% on Monday. The yield on the US 10-year Treasury note was little changed around 4.23% and the US dollar index reversed from 1-month highs. We’ve seen a slightly stronger yen as Japanese government officials continued their jawboning to defend the currency.
While the Federal Reserve (Fed) stuck to its projection of three rate cuts this year, other major central banks similarly signalled that an easing cycle was in play. Investors await further catalysts to assess the timing of the Fed’s rate cuts as a slew of mostly second-tier economic data drops in this week. One might argue that the Fed will now be more sensitive to downside risks in the economic data flow than upside outcomes in the data, which could trigger some volatility across the FX space. This is because we’re seeing evidence that the reaction function of the US dollar to incoming US data is asymmetric – whereby the dollar’s sensitivity to strong macro data has been underwhelming relative to its reaction to weaker data, which seems to be moving the currency more. Yesterday saw the Chicago Fed national activity index edged up to a 3-month high, but measures of manufacturing activity in Texas showed concerning declines whilst new home sales unexpectedly fell, which dragged the US dollar lower. Today we have the Richmond Fed index, consumer confidence, durable goods and Case-Shiller home prices to digest.
It’s hard to bet against the USD significantly in the short-term given its high growth and yield appeal, but we do expect its strength to moderate further and a downtrend to resume in the second quarter as investors position for more rate cuts by the major central banks.
Pound rebounds off key moving averages
George Vessey – Lead FX Strategist
GBP/USD bounced off its 200-day moving average at $1.2592 yesterday, resisting a potential drop to test its 50-week moving average at $1.2575. The currency pair is back trading in the middle of its interquartile range of Q1, helped by upbeat industry figures on UK retail sales yesterday. GBP/EUR also extended its rebound from 9-week lows recorded last week.
The Confederation of British Industry’s (CBI) monthly retail sales balance edged up in March. The gauge of sales over the year rose to +2, up from -7 in the previous month and ends a 10-month spell of declines. The stabilisation of retail sales provides some hope that the sector’s downturn is bottoming out. The news follows last week’s official data which showed British retail sales held steady in February, defying forecasts of a fall. The prospects for a consumer-led recovery in UK GDP growth are growing given the pace of disinflation right now with the 6-month annualised inflation rate running at 1.5%. The dovish Bank of England (BoE) twist of late has galvanised expectations they will start cutting interest rates from June, which should support consumer confidence and spending. Money markets are even pricing in a small probability of a cut in May, which weighed in the pound last week as UK gilt yields slipped to multi-month lows. There is no significant UK data today, so risk appetite and the USD will likely steer sterling.
A major headwind to sterling’s appreciation is also positioning – as the pound remains the most overbought currency in the G10 space. The 10-year median of net GBP longs is -9.5% of open interest. Currently they sit at around 23%. Although CFTC data showed the net GBP long position shrank from a 17-year high of 70,451 contracts to 53,200 contracts in the week to March 19, GBP downside potential may be exacerbated in the coming weeks especially if these long positions unwind further. A surprise rate cut in May could be the catalyst, but although this isn’t our base case, it’s a scenario that could drag GBP/USD towards $1.20.
German consumer confidence at 3-month high
Ruta Prieskienyte – FX Strategist
European equity markets started the holiday-shortened week on a slightly positive note, extending a streak of nine consecutive weeks of gains. The euro bounced off the $1.0800 support level against the US dollar thanks to a broad US dollar weakening and profit-taking ahead of month-end, despite dovish comments from a typically hawkish ECB policymaker fuelling hopes that the bloc’s central bank might start cutting rates soon.
Over the weekend, Bundesbank President Joachim Nagel confirmed that the probability of the Governing Council cutting rates ahead of the summer recess is increasing, as recent inflation print continued to edge closer towards the bank’s 2% target. Nagel’s sentiment aligns with a growing chorus of policymakers advocating for a potential cut in June. Currently, markets are pricing in an 86bps reduction in rates for the year, equivalent to at least three 25bps cuts, with the first anticipated in June with a 72% probability. However, the policymakers continue to caution markets that the June rate cut is not done deal as certainty that inflation would continue to decline is crucial for this to happen. Despite that, the expanding camp dove membership across the Governing Council saw the yield on the 10-year German government Bund dip to around 2.32% during Monday’s trading session, a near-two week low.
Despite yesterday’s bounce, the euro remains fragile to further weakness over the short-term. The latest Gfk print for April saw a third consecutive rebound, but disappointed market expectations dampening EUR/USD ascent. Later today, US durable goods report comes into focus. An upward rebound from last month’s print, which marked the most substantial monthly decline since April 2020, could see EUR/USD break below the $1.0800 barrier and test a 5-week low. Meanwhile, the surprise SNB rate cut last Thursday has heightened speculations that the ECB will soon follow in its neighbour’s footsteps. The two central banks have a history of mimicking each other, although it is normally the SNB which follows the ECB. As markets continue to price in additional policy easing in Q2, further EUR/USD upside remains capped, and the euro is likely to struggle to gain against the US dollar without a fresh impetus.
Swiss franc and Japanese yen both down over 1% against the euro
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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