Written by Convera’s Market Insights team
New reality of higher for longer sets in
Boris Kovacevic – Global Macro Strategist
The US dollar continued its ascent after Fed Chair Jerome Powell acknowledged the recent string of much stronger macro and inflation data in a speech and signaled that policy might need to stay restrictive for longer. With the 3-month average jobs growth running at 244 thousand, 3-month annualized core inflation at 4.5%, policy makers will most likely be able to sit out a couple of meetings and hold rates unchanged.
Investors are adjusting to this new neutral Fed with selling government bonds and buying the US dollar. Treasury yields have risen to their highest level since November with the two-year yield briefly touching the 5% mark. The US Dollar Index rose for a fifth consecutive day, recording its best streak since October and extending its year-to-date gain to 4.9%. Powells acknowledgement was the final blow to investors hoping for lower rates this year. Markets came into 2024 pricing in six rate cuts by the Fed. These speculations have been crushed by above trend growth and inflation and have been reduced to just a single cut coming in September.
The real economy has remained resilient against interest rates at two-decade highs. However, as the higher for longer rates regime takes hold and mortgage and business loans adjust to the upside, some pain might still be ahead of us. New home construction fell to its lowest in nine months in March as the demand for new housing is dampened by high interest rates. Without any relevant data points scheduled for today, we turn to the economic releases on Thursday for guidance on the US economy. Second tier data like initial jobless claims, the Philadelphia Fed Manufacturing Index, the Conference Board Leading Economic Index, and existing home sales will be closely watched.
Canadian dollar retreats from 5-month lows
Ruta Prieskienyte – FX Strategist
The Canadian dollar depreciated past $1.38 per USD in April, its weakest since early November, as evidence of moderating domestic inflation drove markets to outline contrasting forecasts between the Fed and BoC monetary policy. During yesterday’s interview Fed’s Chair Powell confirmed US rates will likely remain higher for longer given aa dissatisfactory inflation progress over the past several months. Meanwhile the BoC is getting increasingly more comfortable with discussing rate cuts, and the June remains a live meeting. In fact, the markets are currently pricing in a 68% probability of a rate cut as early as May with 66bps worth of cuts priced in by year-end.
Having said that, yesterday’s CPI print could give a reason for BoC’s Governor Tiff Macklem to postpone rate cuts to end of H1 and beyond. The headline annual inflation rate in Canada rose to 2.9% y/y in March of 2024 from the eight-month low of 2.8% in February, although slightly below the BoC’s forecast of 3%. The uptick was driven by a sharp rise in gasoline prices, which in turn pushed transportation inflation to 3%. In addition, the prolonger period of restrictive interest rates in Canada saw mortgage interest costs rise, keeping rents inflation elevated at 6.5%. Meanwhile, the BoC-watched trimmed mean core rate slowed more than expected, falling to 3.1% y/y.
USD/CAD is currently on track to record its 6th consecutive daily gain, having appreciated over 1% over the past week. The pair continues to retreat from its 5-month lows, but the Canadian dollar faces a resistance barrier at $1.3800 but may not have enough impetus to breach through. As the economic docket will not offer any high-tier data releases on Wednesday, the focus shifts to Fed speeches later this afternoon.
Upside CPI surprise gives Sterling a boost
Ruta Prieskienyte – FX Strategist
On Tuesday, the British pound extended its losses for the third consecutive day as investors digested the latest UK macro reports and the US dollar remains buy thanks to expectations that the Fed would maintain higher rates for an extended period. Weaker risk conditions hampered Pound’s attempt at recovery as European equities extended their slide, with FTSE100 falling by close to 1.8% on the day – the worst plunge in nine months amid global sell-off.
This morning’s latest CPI print showed UK inflation falling to the lowest rate since September 2021 to 3.2% y/y in March, down from 3.4% in the previous month, but above the market consensus of 3.1%. Food prices rose less than a year ago, putting downward pressure on inflation, which was then partially offset by the cost of motor fuel. The core inflation rate, which excludes volatile items such as energy and food, dropped to 4.2% y/y, the lowest rate since December 2021 and also slightly above expectation of 4.1% y/y. Meanwhile, inflation in the services sector, watched by the BOE for indications of domestically driven price pressures, eased to 6% y/y from 6.1% y/y. The pound reversed its earlier losses after the print, rising as much as 0.2% to $1.2445 and snapping three days of declines.
With the calendar light, the key events to watch out for later today will be Fed’s Beige book and a number of central bank speeches from both the Fed and the BoE. Most notably, BoE Governor Bailey is due to speak later today. The BoE policymakers are waiting for evidence that underlying price pressures are subsiding before cutting rates from their 16-high of 5.25%. Markets participants will watch for clues on whether the latest data print is enough to encourage the BoE to cut rates in H1. Any such indications would fuel Sterling weakness and erase this morning’s gains.
USD/JPY hits a new 34-year high
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: April 15-19
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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.
