Written by Convera’s Market Insights team
US PPI eyed before CPI
George Vessey – Lead FX Strategist
The US dollar drifted lower with US Treasury yields at the start of the week as markets brace for a batch of important US inflation data over the next few days. On Monday, yet another survey of US consumer inflation expectations provided a further jolt in the wrong direction. This helped the US dollar index bounce off the 105 support level, with most gains made against the low-yielding Japanese yen, which continues to look fragile against all of its G10 peers.
Year-ahead inflation expectations in the New York Fed’s survey increased to 3.3% in April from 3% in March, the highest since November. Inflation three years from now is seen moderating to an expected 2.8% rise from the prior month’s 2.9%, whilst five-year ahead inflation was seen at 2.8%, versus March’s 2.6%. Survey data continues to point to upside inflation risks in the US and although the Fed still has a bias toward cutting interest rates, the lack of progress on disinflation and the strength of the economy are causing the central bank to pause longer. This has helped the dollar outperform its G10 peers by an average of 5.5% year-to-date. Money markets are currently pricing a 60% probability of the Fed cutting rates in September, but today’s producer price index and Wednesday’s consumer price index readings will have a significant bearing on this pricing. One-week implied volatilities for G10 currencies are mostly higher in a sign that traders are anticipating these inflation reports to induce more FX volatility in the near term.
For the US dollar to extend its May drop, incoming data needs to point to disinflation continuing, not just pockets of weakness here and there. With that said, today’s PPI figures are expected to edge up from 2.1% to 2.2% with the monthly rate at 0.3%. Any big miss or beat of the monthly figure will help gauge the potential CPI outcome tomorrow, so both events could be market moving.
Pound muted after UK jobs report
George Vessey – Lead FX Strategist
Potentially because of lingering questions over its methodology and accuracy, today’s UK labour market report has barely impacted UK assets, with both gilts and the pound flat in the immediate aftermath. Furthermore, despite the unexpected increase in wage growth, the unemployment rate rose for a third month, ticking up from 4.2% to 4.3% in a sign of cooling UK labour market.
Average weekly earnings including bonuses in the UK increased 5.7% y/y in the three months to March 2024, above forecasts of 5.3% whilst regular pay, which excludes bonus payment, went up 6%, the same as in the previous month. Wage growth increased at both the public (6.2% vs 6%) and the private sector (5.9% vs 5.7%), but the figures didn’t deviate too much from the Bank of England’s (BoE) forecasts. Usually, this kind of strong wage data might send the pound higher due to potentially delaying a BoE rate cut. Yet the probability of a June rate cut still stands at 50%. It should also be noted that despite a June rate cut appearing more likely after the dovish BoE meeting last week, GBP/USD has made modest gains above its 200-day moving average in the mid $1.25 area and GBP/EUR has held firm above €1.16.
With the disinflation trend still intact and UK headline inflation expected to fall to 2% by the summer, the BoE has room to become more aggressive on boosting growth potential. We think this could limit the negative impact of lower interest rates on the pound, especially if other central banks, including the Fed, follow suit soon after, creating a risk on environment – a boon for pro-cyclical currencies.
Euro tests 200-day barrier
Ruta Prieskienyte – FX Strategist
Despite a lack of macro data releases at the start of the week, the euro continued to consolidate its recent gains with a slight upward bias as markets are in a waiting mode before the release of inflation data out of the US and a plethora of Fed speakers due this week. European stocks kicked the week off in the red, having just logged their best week since January with gains of more than 3%, while the yield on the German 10-year Bund remained largely unchanged at 2.5%.
Earlier in the session, EUR/USD climbed to a 1-month high of $1.0807 but pared some of the gains on a report that US year-ahead inflation expectations are becoming embedded above the Fed’s inflation target. The euro continues to work against its 200-day SMA as it looks for a catalyst to ignite upward momentum. 1-week implied volatility, an option market expected future volatility, across G-10 climbed higher, with EUR/USD volatility edging up to 6.2% while the longer 1-month tenor shot to an MTD high of 5.96%, as the time horizon now incorporates the ECB rate decision on June 6th, the Fed decision on June 12th, and the US CPI report for May. From a technical standpoint, near-term risks are skewed to the upside as the 1-week risk reversal skew favors euro calls with the largest conviction since Feb 23rd.
Looking at today’s calendar, the key domestic data will be the ZEW survey. If we continue to observe an upward trend in the economic sentiment index, this would most likely act as support for the common currency, but not enough to ignite a sustained rally higher. Ultimately, it will be the US PPI data and Powell’s speech later today that will determine whether EUR/USD can sustain a break above $1.08 or plunge back to the lower end of $1.07.
CAD focus shifts to US inflation reports
Ruta Prieskienyte – FX Strategist
Amid a light data calendar for Canada, the Canadian dollar was little changed at the start of the week, trading around $1.3680 in anticipation of upcoming US releases including PPI on Tuesday and CPI on Wednesday.
On Friday, USD/CAD plunged to a 1-week low in the wake of a huge upward surprise in the number of new jobs created in Canada. Statistics Canada reported a gain of 90.4k jobs in April, surpassing the expectation of 18k gains by nearly five times, with the most positions added in 15 months. As a result, traders pared bets of a BoC June rate cut to 44%, from 65% before the release on Friday. With unemployment rate unchanged at 6.1%, the question whether the BoC can start its easing cycle next month now hinges on April’s CPI print due in a week. A hotter-than-expected jobs report means core inflation needs to be convincingly cooler for the Bank of Canada to go ahead with a policy cut next month. A further deceleration would boost the odds for a June rate cut, while an uptick in the index could likely extinguish such easing hopes.
Looking ahead, the key domestic data compromises of wholesale price report to gauge what price pressures are waiting in the pipeline. However, the US inflation print, and Fed Chair Powell speech later today will ultimately dictate the near-term trajectory of USD/CAD. From technicals perspective, USD/CAD is supported by 35-day SMA near $1.3668 and faces resistance at 21-day SMA just above $1.3700 level. However, the overnight implied volatility for the pair shot up to a 13-month high, today’s PPI or tomorrow’s CPI will be sufficient for the pair to break out of the near-term constrained conditions.
G10 FX mostly flat bar weaker JPY
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: May 13-17
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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.
