June 14, 2024

“Cooling US inflation should have sent the dollar lower yesterday, but this week’s volatility from European politics has been more impactful in hurting the euro. Consumer sentiment is the biggest data release today, although markets will be watching out for any new developments in France.”

Tim Hallinan – Trading Director

Main Headlines

The Japanese yen slumped to a six-week low this morning after the Bank of Japan struck a far more cautious stance than markets were expecting. Media reports had hinted at an announcement of plans to taper the BoJ’s huge bond buying program, but these are now set to arrive at the July meeting. The caution has prompted markets to reduce their bets for further rate hikes this year after it exited negative interest rates in March.

‘Wealth creation’ and ‘change’ were the central buzzwords in the election manifesto announcement for the UK’s Labour Party in Manchester yesterday. Keir Starmer was keen to keep his poll lead steady and not to rock the boat with any big surprises, promising stability, support for business, a National Wealth Fund, and an increase in tax for private school fees and private equity.

GBP

While sterling spent yesterday giving up its gains against the dollar, domestically driven euro weakness lifted GBP/EUR to a fresh 22-month high. The pound is now heading for a fifth consecutive week of gains against its continental partner, and there could be more euro weakness to come, but some key tests to the British rates outlook are on the way for next week. The May UK CPI report arrives on Wednesday only a day before the Bank of England decision, where the market-implied chances of a rate cut have slumped from a near certainty to around 5% on the back of some red-hot services inflation data. The BoE’s quarterly 12-month consumer inflation expectations survey is the sole data point today, where recent sharp falls in the headline CPI figure should continue to take the figure lower.

EUR

Despite solid signs of disinflation in the US, the euro is not having a good week. Political turmoil in France continues to send the common currency lower, with mounting concerns about the prospect of Macron losing power next month after his approval rating falling to its lowest level in six years. The yield spread between 10-year French and German government bonds – i.e. the clearest representation of the extra risk associated with lending to the French government – touched its highest level since 2017 yesterday. Markets are chiefly concerned about the implications for fiscal discipline and the debt load, if far-right parties come into power with promises to ramp up spending despite an already deep budget deficit. Add in a potential EV tariff war between the eurozone and China, and it’s a toxic mix for the euro. A speech by ECB President Lagarde this evening is the biggest event for the euro this afternoon.

USD

Yesterday’s data brought yet more signs of disinflation in the US, yet the dollar continued to claw back gains after the hit from CPI on Tuesday. PPI inflation posted a 0.2% contraction in May, undershooting forecasts for a 0.1% rise, while the core figure shrank from 0.5% to 0.0%. Unemployment claims, meanwhile, rose to a 10-month high at 242K, driven in part by fast food worker layoffs in California following a big spike in the minimum wage. Initial losses from boosted rate cut hopes were swiftly recovered, however, as European sentiment and stocks sank, taking a hit to risk appetite. UoM consumer sentiment is the data highlight today, ahead of retail sales early next week.

Markets

Fortunes in the equity markets were starkly different in the US and Europe yesterday. Cooling producer price inflation helped the S&P 500 and the Nasdaq to record highs for a fourth consecutive session, while political turmoil and a potential Europe-China tariff war hit European stocks. The STOXX 600 suffered its worst day in two months, falling 1.3% as automotive stocks slipped.

Main Economic Events (All Times CET)

6:30am: Bank of Japan Rate Decision
10:30am: UK Consumer Inflation Expectations
11:00am: Eurozone Trade Balance
4:00pm: US UoM Consumer Sentiment

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