Written by Convera’s Market Insights team
Dollar clips fresh 6-month high
Boris Kovacevic – Global Macro Strategist
The US dollar extended its gains against a basket of currencies yesterday after producer prices added to concerns about persistent inflationary pressures in the US. The dollar index hit a fresh 6-month high along with US Treasury yields as bets on Fed rate cuts have been slashed and global risk appetite has been rocked, with US equity benchmarks poised for their first 2-week decline since October 2023.
The goods side of the inflation equation had bottomed at the end of last year and has now stopped improving. Shipping rates, the Fed’s supply chain pressure index, commodity prices, the global inflation surprise index and the US dollar all bottomed in Q4 and have since then rebounded. While the push higher has not been too concerning, it does add to the risks central banks are facing in addition to services inflation remaining sticky. We conclude that the global inflationary impulse has picked up in Q1. Yesterday’s US PPI report supports this narrative as producer inflation increased by the most in 11 months, rising by 2.1% in March. The core metric rose to 2.4%, highlighting the increase in the cost of services. However, the monthly increase fell short of the consensus, rising by just 0.2% instead of the 0.3% expected.
Markets now expect the Fed to cut interest rates two times this year, starting in September. Continued USD strength cannot be ruled out as a result of higher US yields and US economic resilience, but given the extremely hawkish repricing of late, USD upside may be limited unless other central banks do go ahead and cut first, which we think is unlikely at this stage.
Pound stabilises near 2024 lows
George Vessey – Lead FX Strategist
Although the UK economy sank into a technical recession at the end of last year, investors have been encouraged by recent upbeat business surveys that suggest the downturn will be short lived. Indeed, UK GDP came in at 0.1% m/m in February, in line with market consensus, but at a slower pace than the month prior. The largest contribution came from production which soared 1.1%, rebounding from a 0.3% fall in January. In contrast, construction shrank 1.9%, after a 1.1% increase. Considering the three months to February, the British GDP grew 0.2%.
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. However, we’ve seen a marked shift in these expectations and now the BoE is priced to cut rates more than the Fed. UK-US yield spreads have fallen sharply to 1-year lows and GBP/USD has been dragged down to fresh 2024 lows as a result. BoE policymaker Megan Greene stated yesterday though that markets were wrong to expect earlier and more rate cuts in the UK compared to the US this year though. GBP/USD downside risks have stabilised somewhat following Wednesday’s plunge fuelled by US CPI, but recovery attempts will likely remain limited ahead of sterling’s UK inflation test next week. Any outcome that pulls forward UK rate-cut expectations could lead GBP/USD to take out early December support at $1.25 and target the 100-day moving average just under $1.23 over the next month or so.
The pound remains more upbeat against other peers, however, up 1.4% against the euro this year, partly because the ECB is expected to cut rates more than the BoE. The currency pair lacks volatility and momentum in either direction though, caught in a tight 1.2% range for the past three months. Policy and growth differentials remain key as ever, so we’re watching the data closely for clues.
Euro crumbles on dovish ECB tone
Ruta Prieskienyte – FX Strategist
Unsurprisingly, the European Central Bank (ECB) left its key policy rates unchanged from record highs during the rate decision yesterday, but it gave its clearest signal to date that it is ready to start cutting rates soon. The euro weakened to $1.07, the lowest in about two months, while the yield on the 10-year German Bund held at the 2.45% mark, hovering close to its highest level in over four months, underpinned by pressure in the US Treasury market.
Satisfied with the disinflation progress in bringing inflation back to its 2% target, the central bank stated it would be appropriate to reduce the tightness of policy, pointing to a likely cut at the next policy meeting in June. President Lagarde did not offer further clues about future policy moves in the press conference, once again maintain ECB’s data dependant approach, but reiterated the ECB’s independence against claims that policy moves will be dictated by what the Federal Reserve does. Despite a handful of historic occasion of independent policy manoeuvres, as mentioned in yesterday’s note, we remain sceptic of this. We continue to hold the view that ECB will cut the rates before the Fed, but subsequent ECB policy outlook will be closely correlated with US developments, with the later being a more important driver. Overall, the money markets are pricing in 17bps of easing for ECB’s June meeting and 73bps by year-end.
EUR/USD starts the day under heavy bearish pressure, with the pair shedding over 0.5% in the early Friday trading session. EUR/USD extends its cumulative 3-day losses to 1.6% – the worst performance in 14 months. With RSI edging to overbought territory, we expect the pair to consolidate near close to $1.0700 level, but for now the pair is eyeing $1.0650 as its next support level to break the freefall.
Gold breaks past $2,400 barrier
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: April 8-12
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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.
