Written by Convera’s Market Insights team
Dollar drifts lower on renewed rate cut bets
Boris Kovacevic – Global Macro Strategist
Global financial markets started the week on a positive note despite the lacklustre trading session on Monday being shaped by European and Japanese investors on holiday. China came back from a 5-day break seemingly refreshed with investors pouring into equities, already setting the CSI 300 on a path to record its fourth weekly rise in a row. The positive capital rotation into Chinese equities came on the back of the Federal Reserve (Fed) first laying the groundwork and the disappointing US jobs report then finally giving investors the green light to price in more policy easing from the central bank for 2024.
With futures now pricing in two cuts from the Fed once again, global equities rose, and government bond yields fell to start off the week. The US dollar declined against most of its peers, with the dollar index slumping to a fresh 3-week low. However, the weakness of USD/CNY stood out the most as the currency pair recorded its single worst day so far this year, falling by 0.5% to a 6-week low. Zooming out a bit, we have recently proposed two macro theses that are starting to unfold, and which might complicate the picture for the Fed going into the second half of the year. First, the global inflationary impulse and the goods side of inflation have bottomed and are on the rise again. Second, the US labour market and economic growth are more likely to surprise to the downside. This poses a conundrum for the Fed, that is complicated by the upcoming presidential election in November.
Q2 inflation misses and further moderation in job and wage growth might sway policymakers to cut rates in July. However, an early pivot and pipeline price pressures might anchor headline inflation above the 2% target in 2025. The incoming data will be crucial to gauge how much of the goods inflation uptick will be combatted by with falling wage pressures.
Bright start to sterling’s week
George Vessey – Lead FX Strategist
After a sunny UK bank holiday weekend and crushing defeats for the ruling Conservative party in the local elections, the British pound has taken it all in its stride, starting the week on the offensive, extending gains above the the $1.25 handle versus the US dollar, though demand looks to be fading this morning. The Bank of England’s (BoE) monetary policy meeting this Thursday is the key risk event to watch as analysts and investors wrangle over whether a rate cut is coming in June or August.
Hawkish policy repricing , particularly in the US, has been driving markets recently, which has been less supportive for the pro-cyclical pound. After the March BoE meeting, markets priced just short of three 25 basis point rate cuts before the end of this year. Currently, only one cut is fully priced, with just over a 50% chance of a second cut. But after the dovish Fed meeting and softer US jobs report last week, traders shifted focus back to rising odds for Fed rate cuts in 2024, with narrowing US-UK yield spreads allowing GBP/USD to stretch higher for a second week running, now over 2% above its 5-month low around $1.23. the BoE is expected to keep interest rates unchanged this week, but the jury is out on whether it will pivot as soon as June despite services inflation and pay growth running slightly above the central bank’s previous forecasts.
Recently, BoE Governor Andrew Bailey drew a clear distinction between the US and UK inflation outlooks, hinting at a rate cut by the summer, so we could see downgrades to inflation forecasts and potentially further dovish tweaks in its forward guidance. Such a scenario could limit the pound’s upward momentum of late, but the revival of overall market optimism towards rate cuts by the G3 central banks is likely to be supportive for pro-cyclical FX like GBP.
Sentiment favours euro for the first time since March
Ruta Prieskienyte – FX Strategist
Lack of decisive US dollar trading and improved risk appetite bolstered the euro’s fourth consecutive daily advance. The German 10-year bond yield fell below 2.5%, the lowest in more than a week, and the euro briefly rallied to a near 4-week high of $1.0791 as markets revised their expectations for Fed interest rate cuts following the release of a weaker-than-anticipated US jobs report on Friday. European stocks closed firmly higher, recovering from sharp losses the week prior.
Across the macro data space, the Eurozone composite PMI was revised higher to 51.7, up from an expected 51.4, following an upward revision in the services sector PMI and taking the headline index to an 11-month high. Elsewhere, the Eurozone producer prices fell by 0.4% m/m in March, in line with consensus, marking a 5th consecutive monthly decline, driven by a continued drop in energy costs. Excluding energy, producer prices rose 0.2% m/m and declined by 7.8% when compared on a yearly basis. Speaking in an interview, Chief ECB economist Philip Lane noted that recent data have made him more certain that inflation is returning to the 2% goal, aligned with market expectations of the central bank’s first interest-rate cut in June.
Despite the initial rally, EUR/USD has been unable to retest the key $1.0800 barrier and retreated to its 35-day SMA support level at $1.0752 after a miss on German factory orders print this morning. The pair continues to struggle to get past the 50-day SMA at $1.0792, before any attempts can be made to test the 200-day EMA sitting just above. With the ECB expected to cut rates in June, there is an overarching downward bias in EUR/USD over the medium term. But for now, the euro is enjoying the improved near-term outlook. 1-week EUR/USD risk reversal skew has flipped in favour of calls for the first time in 2-months, as traders are growing increasingly euro bullish over the near-term horizon.
Oil down over 4% in seven days
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: May 6-10
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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.
