Written by Convera’s Market Insights team
Focus on US GDP
George Vessey – Lead FX Strategist
The US dollar has regained some lost ground following the PMI slump on Tuesday. Although markets were taken by surprise by the diverging business surveys between the US and Europe, calling into question the notion of US economic exceptionalism, the monetary policy outlook didn’t alter too much. Money markets are still pricing in less than two quarter-point rate cuts by the Federal Reserve (Fed) this year but even a slim chance of a hike.
Soft data, like PMI surveys, is useful in gauging the direction of economies, but haven’t been as market moving as the hard data, especially inflation and employment reports. Hence, todays US GDP figures, but more importantly Friday’s PCE inflation report followed by next week’s Fed meeting and jobs data, will be crucial in determining whether the Fed maintains its current policy stance, keeping rates higher for longer and whether the dollar’s strong start to 2024 has more legs in it. The dollar will likely continue to benefit from its position as a high yielding, high growth, commodity-backed safe haven currency. But the price action this week, coupled with the overcrowded speculative bet on the USD appreciating, does raise questions about the magnitude of any further dollar gains, especially with USD/JPY at fresh 34-year highs with a growing threat of Japanese intervention.
The current levels or core, medium and trimmed inflation momentum have historically been associated with the Fed hiking, not cutting interest rates. Indeed, options markets now suggest a roughly one in five chance of a US rate hike within the next 12 months. If this probability rises or if we witness another external shock, such as an escalation in geopolitical tensions in the Middle East, dollar demand will remain robust.
Pound consolidates gains
George Vessey – Lead FX Strategist
The British pound held onto its gains against the euro and US dollar yesterday, helped by a survey revealing British manufacturers are readying to boost output in the coming months, fuelled by increasing confidence. GBP/EUR is trading back above its 200-day moving average support level but remains almost 1% lower than last week’s high of €1.1735. Meanwhile, after its biggest daily rise of 2024 on Tuesday, GBP/USD is stretching closer towards $1.25.
The Confederation of British Industry’s (CBI) quarterly Industrial Trends survey showed that business optimism rose to its highest level in nearly three years while sentiment within the manufacturing sector improved, with output expectations the strongest for six months. However, price pressures continued to build, with the corresponding index rising to the highest level since February 2023. Overall, the data didn’t really move the pound much, but following the upbeat UK PMI surveys earlier this week, the improving UK economic outlook should be supportive for sterling over the longer term. In the near term though, a further divergence in the UK-US interest rate outlook could punish GBP/USD. Less than two 25 basis point rate cuts are currently priced in for both central banks, but we think there’s scope for more dovish BoE repricing, especially if the UK central bank moves before the Fed, which is appearing increasingly likely.
GBP/USD is over 3% lower than its 2024 high just shy of $1.29 and has been caught in a steep downtrend since March. US data continues to be the main driver of FX trends of late, so all eyes will be the key hard data release from across the pond this week and next. To be confident in the currency pair returning towards $1.30, we need to see GBP/USD rise and comfortably remain back above its key daily moving averages, with the first target being the 200-day located at $1.2560.
Can EUR/USD sustain above $1.07?
Ruta Prieskienyte – FX Strategist
After repeated attempts, the euro has cleared the $1.07 threshold amid US dollar weakness as disappointing private sector growth and US business activity reports revealed cracks in the façade on US exceptionalism thesis. The recent strong domestic reports have also enticed euro buyers, pushing EUR/USD to a fresh 2-week high.
The latest Ifo report showed that German business sentiment improved to its highest level in a year — reinforcing signs that Europe’s largest economy is healing. An expectations gauge rose to 89.9 in April, up from the previous month and in excess to market consensus, with current conditions measure also advancing. A stronger global economy and the prospect of looser monetary policy in the Eurozone are helping drag Germany out of the recessionary conditions. In just 6 weeks, the ECB is expected to join the SNB in loosening its policy rates from record high levels. While the ECB officials appear aligned on a June rate cut, the subsequent path remains contested. While several officials are supportive of three or even four rate cuts by year end, some would prefer to steer on the more cautious side and not risk repeating Fed’s mistake in the late 1960s. ECB’s Nagel is among the more wary officials supporting the beginning of monetary-policy easing in June, but calling for prudence when it comes to following moves highlighting that the ECB should not commit to a specific easing trajectory.
An upward surprise in the German Gfk survey released this morning was just the gentle nudge that the euro needed to sustainably trade above $1.07. Investors now turn attention the advance US GDP print, where an upward surprise could yet again plunge EUR/USD below $1.07. Looking at the options market, traders remain bearish on the euro, albeit with a lower conviction. While betting on a weaker euro over the next week still requires a premium, the negative 25-delta risk reversals skew shifted higher for the sharpest repricing in over a year.
JPY fragile, down another 1% against GBP and EUR
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.
