Written by Convera’s Market Insights team
Note: The Daily Market Update will take a break over Easter and return on 2 April
Dollar consolidates after mixed data
George Vessey – Lead FX Strategist
Apart from the Japanese yen falling to fresh 34-year lows against the US dollar, it was mostly yet another quiet day across financial markets in the end yesterday. The most notable moves in G10 since the start of the week have been the further sell-off in G10 low-yielders, such as the yen, but more so the Swiss franc after the surprise rate cut by the Swiss National Bank last week. There’s been a slew of economic data from the US to digest this week though, whilst final Q4 GDP results are due today and key inflation figures loom tomorrow when stock and bond markets are closed for observance of Good Friday.
New orders of durable goods in the US rose by 1.4% m/m in February, more than market expectations of a 1.1% increase. Regional Fed surveys have come in mixed, with the Chicago activity index edging up to 3-month highs but the Dallas manufacturing index slipping. US new home sales unexpectedly dropped, and house prices fell for the first time in seventeen months, but the Case-Shiller 20-city home price index rose by 6.6% y/y in January, the largest increase in home prices since November 2022. Overall, the US economy remains strong, but we think economic momentum will continue to moderate through the year, allowing the Fed to cut interest rates three times in 2024 and sending US yields and the dollar lower.
The risk to our base case is if we see a reacceleration in US economic momentum, coupled with sticky inflation, forcing the Fed to keep rates higher for longer than expected. We await the latest US PCE price index report this Friday for further clues on the path for Fed policy. A big upside surprise could call into question the June rate cut currently priced in by markets and could see the dollar inch closer to fresh 6-week highs against a basket of currencies.
Pound hopes to spring into April
George Vessey – Lead FX Strategist
Seasonality patterns look favourable for the pound. Traditionally, the pound performs the best against the US dollar in the month of April compared and over the past two decades, GBP/USD has risen, on average, by 1.2% during this month. But stretched bullish GBP positioning is a major headwind for sterling, and the risk of an earlier BoE rate cut than its G3 peers is also something to be more wary following the latest central bank meetings.
As expected, the Bank of England (BoE) left interest rates unchanged at 5.25% last week and maintained its outlook for inflation and growth. But the dovish surprise was that two policymakers who had previously voted for a rate hike switched to a hold. As a result, there is now around a 20% chance the BoE could deliver a quarter-point cut at its next meeting in May according to market pricing. In comparison, markets are pricing roughly a 13% chance for a Fed rate cut in May and 5% chance the ECB cuts at its next meeting in April. This has weakened the pound’s yield advantage of late with UK-US 2-year spreads falling to 1-year lows. Nevertheless, despite speculators trimming their bullish bets on sterling recently, albeit from 17-year highs, GBP/USD has modestly rebounded this week, back into the middle of its 1-year trading range.
Our base case is still to see sterling appreciate against the US dollar through 2024, closer to the $1.30 level, but if UK economic momentum starts to wane, combined with a faster fall in UK inflation, the probability of a BoE rate cut in May could increase. Things could turn sour for sterling in this case, and the lower $1.20s could come back into play.
Euro edges lower after more dovish ECB talk
Ruta Prieskienyte – FX Strategist
The euro remained largely unchanged on Wednesday against the US dollar, trading below its 200-day simple moving average, as markets wind down ahead of the Easter break. So far this week, EUR/USD has traded in an unprecedently tight range of 64 pips amidst a lack of market-moving news. The economic sentiment indicator for the Eurozone increased to a 3-month high, but the news was largely ignored in favour of dovish ECB speak.
The ECB board member Piero Cipollone (dove) confirmed that the Governing Council is getting increasingly confident that inflation will fall back to its 2% target by mid-2025 as wage growth moderates, strengthening the case for lower interest rates. The bank has flagged a possible rate cut for June conditional on further good news on wages, which appear to be on track to gradually moderate in the medium term towards levels that are consistent with the central bank’s inflation target and productivity growth. An oversized emphasis has been placed on Q1 wage data, due out in late May, suggesting that the rate path remains unclear for now. Despite compensation per employees declining to 4.6% in Q4 2023, the rate remains above the 3% level the ECB considers to be in harmony with its 2% inflation target.
EUR/USD is poised to incur a 2% loss in Q1 2024 – the worst YTD performance since 2021. The pair has been stuck in the broader $1.0500 – $1.1100 range for nearly 14 months and unless US data surprises emerge, intense moves are unlikely. Today’s key events include German unemployment and the Eurozone’s lending reports, but both are expected to be brushed off in favour of US final GDP print due later today. Meanwhile, Friday’s US PCE report poses a risk if the print deviates substantially from the consensus as most markets will be closed for the Easter break. Across other EUR crosses, EUR/SEK climbed to a fresh 4-month high as Sweden’s Riksbank hinted that the borrowing cost can be cut in May or June if inflation prospects remain favourable. Meanwhile, EUR/CHF is trading at its highest level in nearly eight months and is headed for an eighth weekly advance, its longest winning streak since 2003 on the back of last week’s surprise SNB rate cut.
CHF and SEK are the biggest losers this week
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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