June 25, 2024

“A softer dollar and improved risk appetite has lifted the euro and sterling early in the week amid a brief lull in the data flow. The focus now is on Canadian CPI and the elections in the UK and France, while markets gear up for the flood of inflation data in the eurozone and the US towards the end of the week.”

Sam Cornford – Head of Trading

Main Headlines

Figures released by the Transportation Security Administration in the US said that it had security screened a record-breaking 2.99m airline passengers on Sunday, in sign of a strong recovery for the pandemic-hit airline industry. With the Independence Day vacation period continuing through to July 8, the TSA expects the record to be broken further on Friday with over 3m passengers.

The UK’s Institute for Fiscal Studies argued yesterday that the recently released manifestos for the Conservatives and the Labour Party hinge on a ‘conspiracy of silence’, with regards to upcoming budgetary challenges that would hinder the implementation of the promised savings. Director Paul Johnson cited rising debt interest, health, and defence spending, alongside the green transition and an ageing population as reasons for a likely necessary rise in taxes for either party when one comes into power.

GBP

A supportive risk backdrop and a receding dollar lifted sterling yesterday, and external dynamics are likely to remain in the driving seat this week. The election polls continue to signal a sizeable Labour majority which will have little room to manoeuvre under the current fiscal constraints, and the certainty here precludes the material market-moving impact that would be felt by a hung parliament or by a party promising big tax cuts or high spending, as is the case in France. The end of the election period should provide markets with some extra clarity on the British rates outlook, however, when BoE speakers are released from the election blackout. Swaps traders are still pricing in around a 65% chance of a cut in August.

EUR

While the euro remains under pressure ahead of the French election, modestly subdued fears of fiscal recklessness by the National Rally in France and a broader rally in risk-sensitive FX generated a 0.4% recovery in the common currency yesterday. That’s despite a weak German business climate report, dampened by more pessimistic expectations and a declining backlog in the manufacturing sector. Germany’s industrial woes are a familiar story to markets by now, however, and a compression in the spread between French and German government bond yields was the bigger story of the day, after potential RN leader Bardella and others pledged to ‘bring the country back to budgetary reason’.

USD

The US dollar has cooled off on a broad basis after hitting two-month highs at the end of last week, and it is idiosyncratic developments under the spotlight for a number of its major peers. The rally in USD/JPY has hit a wall just below the 160 threshold that induced a round of intervention from Tokyo a couple of months ago, with Japanese officials warning about responding to ‘excessive volatility’ once again – traders will be on high alert going into the Tokyo core CPI print and the US core PCE index on Friday. A further cooling expected in the Canadian CPI inflation data puts eyes on USD/CAD this afternoon, where another broad decline across the BoC’s gauges could bump up the probability of a second rate cut next month. CB consumer confidence is the only notable piece of data in the US today, and the consensus is looking for a return to the downward trend that we saw in the first four months of the year.

Markets

A big round of profit-taking has swept across the AI and tech sectors over the past few days, with Nvidia’s 13% crash representing a loss of over $500bn compared to its peak last week. A simultaneous rotation into cheaper stocks means that US indices have largely held their value, however, with the 1% slide in the tech-heavy Nasdaq offset by a 0.7% rise in the price-weighted Dow and only a modest decline in the S&P 500.

Main Economic Events (All Times CET)

7:00am: BoJ Core CPI
1:00pm: Fed’s Bowman speaks
2:30pm: Canadian CPI
4:00pm: US CB Consumer Confidence
6:00pm: Fed’s Cook speaks

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