June 12, 2024

“In what is set to be a blockbuster day for FX, markets are treated to both a US CPI print and a Federal Reserve rate decision. The Fed have a month of weaker data in May, a strong payrolls report from last week, and a last-minute inflation figure to deal with today, and whether policymakers are expecting further cuts at all this year will be critical for the dollar.”

Tim Hallinan – Trading Director

Main Headlines

Following six months of negotiations, Dutch election winner Geert Wilders announced yesterday that a final coalition agreement with three other right-wing parties has finally been reached to form a government led by Wilder’s PVV party, although cabinet positions are yet to be negotiated.

UK Prime Minister Sunak’s Conservatives party threw out some final pledges in an attempt to overturn a heavy lag in the polls yesterday, with £17bn in tax cuts and a promise to build 1.6m homes in five years on offer. At a speech in Silverstone, Rishi announced a further 2 percentage point cut to employee’s National Insurance by April 2027, as well as a home-building manifesto and a pledge to permanently abolish first-time buyer stamp duty.

GBP

Sterling has been undeterred by weaker unemployment and flatlining GDP in April so far this week, having recovered a portion of the non-farm payrolls losses against the dollar and touching a fresh 22-month high against the euro in yesterday’s session. Yesterday’s employment report was a mixed bag to say the least, and underscored the uncertainty surrounding the ONS surveys – despite an initial drop on an uptick in unemployment to 4.4%, still sticky 5.9% wage inflation kept a lid on any sterling selloff, although two-year gilt yields are now down a net 10bps. The GDP report this morning showed a stagnating UK economy in April, as expected, and was weighed down by industrial output and wet weather. Markets are unconcerned, though, and the growth outlook remains relatively bright, fuelled by rising real wages. The UK calendar is sparse for the rest of the day, so the US data and European politics will be in the driving seat for the pound.

EUR

The euro has turned to consolidation this morning in some subdued trading ahead of two headline events across the Atlantic later today. A press conference from Macron this morning is the one potential source of domestic volatility today as political developments continue to steer the common currency this week. Attention will turn back to monetary policy soon after, however, and the ECB’s divergence to the Fed will be back under the microscope with some inflation data and a rate decision. The ECB cut rates for the first time last week, of course, and for now markets are not expecting one to arrive in the US until the time when European rate-setters are likely considering their second.

USD

A headline double bill awaits the US dollar in one of the biggest days for FX so far this year, as traders look to the May CPI report and a fresh Fed dot-plot to guide their latest adjustments to rate cut expectations this year. Headline CPI inflation this afternoon is expected steady at 3.4% year-on-year and the Fed will likely welcome what is expected to be the first 0.1% monthly print since November. The preferred core measure, however, which excludes the more volatile food and energy components, has a steady consensus estimate at 0.3% – that would negate any regained confidence in the US disinflation trajectory from the headline figure. Either way, it comes too late for the ‘dot-plot’ rate projections coming from Fed policymakers this evening, where an expected three cuts this year is likely to become one or two – or possibly none, in the most hawkish case. It will influence Powell’s tone at the press conference, however, and his dovishness here has knocked the dollar at the previous few meetings. With each higher-than-expected inflation print, he has so far resolutely kept his sights on rate cuts this year, and may point to the weaker data from last month to justify sticking to this stance.

Markets

Strength in tech pushed the Nasdaq and S&P 500 to all-time highs by yesterday’s close, boosted by a 7% surge in Apple after its latest software and AI announcements got investors suitably excited. The joy spread to Europe and Asia too, although the FTSE 100 took a hit from rising UK unemployment. US CPI and the Fed will be in the driving seat for equities today.

Main Economic Events (All Times CET)

3:30am: Chinese CPI
8:00am: UK GDP
8:00am: German Final CPI
2:30pm: US CPI
8:00pm: Federal Reserve Rate Decision
9:15pm: BoC Governor Macklem speaks

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