Written by Convera’s Market Insights team
Dollar’s reign rolls on
Boris Kovacevic – Global Macro Strategist
The low volatility rate in the FX space means that while the US dollar has risen against 78% of its global peers in the first quarter of 2024, the year-to-date gain has only been slightly above 3%. It will get harder for the US dollar to sustain the momentum given (1) how much Federal Reserve (Fed) easing has already been priced out and (2) that the business cycle is turning positive. However, the surprising strength of the US economy has so far shielded the dollar from any negative headwinds.
The upside surprise of the US purchasing manager index for the manufacturing sector on Monday led investors away from both equities and government bonds as the likelihood of the Fed cutting interest rates in June shortly fell below 50%. The positive macro flow got extended into Tuesday with job openings and factory orders coming in slightly better than expected. While not market moving on their own, both data points add to the feeling of the US economy being able to sustain growth rates for longer than initially thought with interest rates at decade highs. For the first time in months, markets are now even pricing in less rate cuts (2.6) than US policy makers have projected (3) for the year, highlighting how much sentiment towards the economy and Fed have shifted. Today’s ISM services PMI will be the most important data point before Friday’s non-farm payrolls report. Particular focus will be placed on the employment and prices paid subcomponents.
Jerome Powell will have an opportunity to comment on the recent news flow in a speech later today. Both the 10- and 30-year government bond yields sit near their 2024 highs at 4.37% and 4.51% with oil prices topping 5-month highs at $88 a barrel.
Sterling steadies after UK data
George Vessey – Lead FX Strategist
The pound enjoyed a welcome rebound yesterday after falling to near 2-month lows against the US dollar at the start of the week. Revised data revealed the UK manufacturing PMI jumped to a 20-month high in March, signalling a modest rise in activity. However, with markets now betting the Bank of England (BoE) will cut more than the Fed in 2024, sterling’s yield advantage has faded, and upside potential appears limited.
The manufacturing PMI rose above the break-even 50 level – finally in expansion territory for the first time since July 2022. However, the strength of the rebound faces headwinds from tighter fiscal policy, the lagged impact of past interest rate rises, and soft global demand. The final PMI survey suggested that higher transportation costs, owing to the ongoing disruption in the Red Sea, were behind the fastest rise in input prices for a year. And there was further evidence that these cost increases were passed on to consumers. But the strength of downward pressures from other components should mean UK CPI inflation continues to fall in the coming months. Moreover, data from the British Retail Consortium this week revealed UK shop price inflation eased from 2.5% in February to 1.3% in March – the lowest in more than two years – while food inflation decelerated to 3.7%, down from 5.0% previously.
Markets are now predicting a 52% chance of the BoE cutting rates as soon as June, with a cut fully priced in for August. GBP/USD remains capped below its 200-day moving average since UK-US rate differentials have converged, whilst GBP/EUR remains in a narrow trading range in the higher realms of €1.16. If Thursday’s final services and composite PMI numbers confirm strong readings for the UK, sterling may find further support, especially against the euro.
EUR/USD records worst Q1 since 2021
Ruta Prieskienyte – FX Strategist
The euro continued to trade near 3 weeks low around $1.0750 handle against the US dollar, as investors anticipate more policy easing from the European Central Bank (ECB) compared to the Fed this year. Money markets increased their expectations of future rate cuts by the ECB, pricing in 91bps for 2024, following German data indicating a significant slowdown in inflationary pressures in Europe’s largest economy.
The preliminary report showed that the headline inflation rate in Germany fell to a near 3-year low, dipping to 2.2% y/y in March from 2.5% y/y in the previous month. The decline was driven by a sharp disinflation in the goods sector, as energy cost decreased at a faster pace and food prices fell for the first time in 9 years. Meanwhile, the services inflation remains sticky, rising by 3.7% y/y (up from 3.4% y/y in the previous month), but core inflation, eased further to 3.3% y/y touching its lowest level since June 2022. Contrary to the progress in realised inflation thus far, the latest ECB survey revealed that expectations for inflation three years ahead remained unchanged at 2.5% and uncertainty about inflation expectations was also steady. Provided that inflation expectations can be self-fulfilling, if the long-term inflation expectations continue to remain anchored above ECB’s 2% target, it could be a cause for concern for the Governing Council going forward.
Shortly today, markets will be keeping an eye on the preliminary Eurozone inflation print for March. Given that the flash reports for the bloc’s two largest economies surprised to the downside, there is a material risk that the same could be repeated in the headline rate for the Eurozone as a whole, which would be euro negative. However, Powell’s speech later today is likely to have more of a longer-term effect on EUR/USD, thus we expect more realised volatility on the back of this risk event. Overall, EUR/USD ended Q1 down by 2.8% – the worst Q1 performance since 2021. However, seasonality effects could soon turn to favour the common currency as historically we tend to see EUR/USD appreciate on average in the month of April.
Stocks down, yields up as rates seen higher for longer
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: April 1-5
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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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