April 05, 2024

“Diminishing risk appetite and hawkish Federal Reserve speakers have helped the dollar to recover some of the losses from the soft services data from Wednesday. Markets are now building up to non-farm payrolls to give FX some more direction.”

Sam Cornford – Head of Trading

Main Headlines

The US Army Corps of Engineers announced yesterday that it anticipates the opening a new channel to the Port of Baltimore by the end of April. The development aims to alleviate the obstruction to commercial shipping caused by a collapsed bridge and subsequently restore port access to full capacity by the end of May.

Figures from UK mortgage lender Halifax this morning showed that British house prices slipped by 1.0% in March, in the first drop since September last year, contrasting with the more upbeat housing indicators this month. Halifax pinned the blame on continued high interest rates following five consecutive months of price rises.

GBP

Incoming data risk in the US and a bout of haven demand have taken some of the shine off sterling’s rebound overnight. The pound spent much of yesterday in consolidation as the final services PMI edged lower but reconfirmed the upbeat economic outlook, before a chorus of hawkish Fed speakers and some geopolitical concerns dragged it downwards. Today is again quiet for sterling, with only the construction PMI this morning – we will look to US payrolls for the strongest cues for GBP/USD.

EUR

The euro has held up relatively better than the pound recently, having steadily ground out 0.4% in gains over the past week despite a string of weaker inflation data. A healthy upward revision to the final services PMI gave it a boost yesterday as the bottoming out eurozone economy continues to ease the pressure on ECB officials to cut rates for activity-related reasons. German factory orders and French industrial production figures this morning have also rebounded from sharp contractions the previous month, albeit very slowly. We get some retail sales data this morning, but the focus for the euro is next week’s ECB policy decision, where markets are likely to get their strongest clues yet on the timing of rate cuts this year.

USD

A haven bid and a raft of hawkish speakers have handed the dollar a leg up, after a chaotic week defined by contrasting signals from the manufacturing and services sector. Geopolitical tensions in Israel have spooked investor risk appetite and sent some funds flowing into the greenback overnight, while comments from Kashkari signalling that there may not be any rate cuts this year have further trimmed hopes for policy easing. Meanwhile, Barkin read from the same script as Powell and Waller, arguing that there is ‘time for the clouds to clear’ on the inflationary outlook and stressed that there was no rush to start slashing the Funds Rate. Risks of a June cut have been steadily diminishing, owing to how little time there is now to bridge that gap in confidence for policymakers. It’s the first Friday of the month, and that means that the markets are laser-focused on this afternoon’s non-farm payrolls report, where the figure is expected to fall from 275K to 212K. As with the past few releases, there is potentially a larger market move to come from revisions to previous figures than from the headline data – a dollar rally on the 275K figure last time was scuppered by 165K in downward revisions to previous months’ data.

Markets

Concerns about escalation in the Middle East startled Wall Street yesterday, with the S&P 500 dipping 2% and crude oil surging to its highest level since October. In Europe, the FTSE fell almost 1.5% and stock futures in Europe are pointing to a weak open.

Main Economic Events (All Times CET)

8:00am: German Factory Orders
8:45am: French Industrial Production
9:00am: Swiss FX Reserves
10:30am: UK Construction PMI
2:30pm: Canadian Employment Change
2:30pm: US Non-Farm Payrolls
3:15pm: Fed’s Barkin speaks
6:15pm: Fed’s Bowman speaks

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