Written by Convera’s Market Insights team
US yields climb but dollar drifts lower
George Vessey – Lead FX Strategist
Despite US Treasuries falling across the curve, with 10-year yields hitting the highest levels since November, the US dollar started the week off on a softer note yesterday. The US dollar index fell closer towards the 104 handle, almost 0.8% lower than its 5-month high recorded last week. Equities also made a cautious start to a busy week of data following a stronger-than-expected US jobs report last Friday leading to a hawkish repricing of US rates.
Odds on a Federal Reserve (Fed) rate cut in June are lengthening following the strong manufacturing PMI and US labour market numbers last week. The chances of a cut by June now stand at 50%, below 60% earlier in the month. Only two quarter point cuts this year are now fully priced in futures markets, with full-year easing bets ebbing to just 63 basis points, yet the dollar has struggled to build on gains in a sign of its asymmetric reaction function. Put simply, the dollar seems to be reacting more to data misses than upside surprises due to the Fed’s focus on inflation and markets already pricing in less rate cuts for 2024 than the Fed’s dot plot. US consumer price inflation for March on Wednesday will be the next big test for the expected policy outlook and for dollar strength.
Another upside inflation surprise could trigger a bigger hawkish reassessment of Fed rate-cut expectations and see the US dollar extend higher. In the FX space, a lot of focus lies on the dollar versus the Japanese yen. The probability of intervention from Japanese authorities will increase if USD/JPY jumps above ¥152 – a level that last traded in 1990.
UK retail sales growth at 7-month high
George Vessey – Lead FX Strategist
Retail sales in the UK jumped 3.2% y/y on a like-for-like basis in March, the strongest growth since August last year. Sterling remains resilient but rangebound, trending north of its 200-day moving average, helped by the risk-on mood in Asia overnight, but capped by its 100-day and 50-day moving averages under the $1.27 handle against the US dollar as traders await US inflation data tomorrow.
The early Easter holiday drove up food sales ahead of the long weekend in the UK. Moreover, an easing in cost-of-living pressures thanks to falling inflation and hopes the Bank of England (BoE) will soon start cutting interest rates supported a rebound in consumption. Retailers are hopeful that with warmer weather around the corner, consumer confidence will spring back up. Later this week, UK GDP growth figures will drop in, and after recording 0.2% m/m growth in January, the market expects the UK economy expanded 0.1% in February. The rule of thumb is that an undershoot in the figures could weigh on the British pound as this would encourage markets to bet on a more aggressive rate cutting path from the BoE. However, the reaction may be muted, with more focus on the US inflation numbers this week and next week’s UK inflation and labour market statistics.
Recall, sterling started the year as the best-performing G10 currency thanks to the relatively hawkish pricing of BoE policy expectations compared to other major central banks. We’ve seen a marked convergence in policy expectations over the first quarter though as inflation has declined enough to bring the UK more in line with the rest of the G10. With more BoE easing priced in but less overall easing priced in for the G3 central banks, the pro-cyclical pound has struggled to extend to $1.30 versus the US dollar.
Euro edges higher as risk sentiment recovers
Ruta Prieskienyte – FX Strategist
The euro bounced back above $1.0850 as appeal for risky assets improved at the start of the week. While DXY lost some ground on the back of sticky consumer inflation expectations report, the euro benefited from better-than-expected industrial production report from Germany along with improving investor sentiment data.
The latest report showed that German industrial production expanded by 2.1% m/m in February, exceeding market estimates of 0.3%. It marked a second consecutive month of expansion and the fastest rate of growth in 16 months, boosted by construction, auto and chemicals activity. As much as yesterday’s data looks promising, this does not mark a significant structural recovery as of yet, but a mere seasonality boost in economic performance. In fact, industrial production is still around 8% below its pre-pandemic level and the less volatile 3m/3m comparison continues to decline. Elsewhere, the latest Sentix report showed that investor confidence across the Euro area strengthened for the sixth month in April, reaching a 26-month high, as expectations turned positive for the first time since the start of the war in Ukraine.
Going forward, investors will focus on the US CPI report for March published tomorrow. Strong price pressures could keep hopes of FOMC rate cuts for June off the table, boosting demand for US dollar, while soft figures could prompt speculation for the Fed pivoting to rate cuts in the same period. On the Eurozone front, the ECB interest rate decision will be announced on Thursday. The central bank is widely anticipated to keep its key borrowing rates steady at 4.5%, but investors will focus more so on the cues about when the ECB will pivot to rate cuts. In the immediate term, having settled above the $1.0850 level, EUR/USD is poised for a short-term bullish trend until Thursday, with the next resistance level at located at $1.0873, the 100-day simple moving average.
JPY down 1% versus GBP and EUR
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.
