June 27, 2024

“A Swedish central bank decision this morning has weakened the krona, while there is GDP, jobless claims, and a presidential debate in store for the dollar this afternoon. There could be fireworks tomorrow, too, with critical inflation data in the US, eurozone, and Japan.”

Sam Cornford – Head of Trading

 

Main Headlines

The Japanese yen touched its weakest level against the dollar since 1986 yesterday, drawing a strong verbal response from Tokyo and raising the alarm bells for another round of market intervention from the Ministry of Finance. Top currency official Kanda said that authorities are ‘seriously concerned and on high alert’ and argued that the yen’s weakness is excessive and driven by speculators. Huge rate spreads between the Bank of Japan’s 0.0-0.1% rate and much of the rest of the world have been a seemingly unstoppable driver of yen-selling over the past few years.

Rishi Sunak and Keir Starmer launched personal attacks in the final televised debate before the UK election next Wednesday. Sunak encouraged voters not to ‘surrender’ to Starmer and the Labour Party, while the Labour leader accused the Prime Minister of being too wealthy to understand the concerns of ordinary people. A YouGov poll put the debate as a tie ahead of the final vote next week, where Labour expected to win a majority after 14 years of Conservative rule.

GBP

Sterling hit a one-month low against the dollar overnight, mirroring some broad softness in the G10 as traders take some risk off the table ahead of tomorrow’s PCE report and the French elections at the weekend. The sparse data calendar proved not to be an obstacle in that context, having fallen around 0.5% through the day. The final election debate last night was not a market mover, but it’s worth picking up on Starmer’s more explicit pledge to renegotiate the Brexit deal – the outcome of that would likely have the biggest impact on sterling from a change in government, given the lack of room for fiscal change. Governor Bailey speaks today about the Financial Stability Report, although with the blackout still in place we won’t get any major clues on monetary policy. Instead, it will be the US data in charge this afternoon.

EUR

The euro clocked another move lower yesterday, with markets positioning more defensively ahead of the first French election vote on Sunday. Politics is still the biggest driver for the common currency, and investors are looking for some certainty about the overall outcome from the first round of voting on Sunday. It is not clear how much they will get, however, with the two-round system conducive to a significant amount of tactical voting in the second round that means a NFP-run National Assembly – the least market-friendly result – cannot be ruled out, despite the National Rally’s lead in the polls. There is only some low tier lending and money supply data out this morning, but CPI prints from France, Spain, and Italy tomorrow will be critical in terms of where the ECB holds rates next month as expected.

Elsewhere, EUR/SEK has jumped by 0.5% so far this morning after the Riksbank held rates but signalled even more room to cut rates in the second half of the year. The statement referred to a preference for a more ‘gradual’ adjustment to policy, given caution around the residual upside risks to inflation, but heavily hinted that this would be followed by a second cut in the August meeting.

USD

The US macroeconomic data continues to exhibit some reasonable weakness, but that hasn’t stopped the dollar from climbing to a near two-month high. Looking back on June so far, inflation has been weaker than expected, the labour market has continued to cool, and short-term US yields have fallen nearly 12bps – in isolation, we would expect be talking about a weaker dollar. Yet a general deterioration in risk sentiment, particularly around European politics, and a rise in cut bets elsewhere have the dollar index up over 1% so far. New home sales were weak yesterday after permits and home starts disappointed last week, and unemployment claims and durable goods orders are the focus this afternoon. Meanwhile, a third and final estimate of Q1 GDP is expected to inch up from 1.3% to 1.4%, although markets are expecting the growth lull to be swept away with a stronger print when we get the Q2 data – the Atlanta Fed’s GDPNow forecasts 3.0%. The first presidential debate is unlikely to cause any dramatic moves, but it could steer some trader attention away from the Fed and towards the election, which is yet to have really affected market pricing.

Tomorrow’s PCE inflation release could be pivotal for USD/JPY. The 38-year low touched yesterday has prompted an escalation in Tokyo intervention threats, but most agree that it would be foolish to act before a potential boost to the yen tomorrow afternoon.

Markets

Amazon shares moved 4% higher to gain a valuation of above $2tn for the first time yesterday, but US markets were largely directionless ahead of tomorrow’s PCE inflation report. Some more defensive positioning crept into European markets ahead of Sunday’s first French election vote, with the STOXX 600 falling 0.6%.

Main Economic Events (All Times CET)

10:30am: BoE Governor Bailey speaks
2:30pm: US Final GDP q/q, Unemployment Claims & Durable Goods Orders
4:00pm: US Pending Home Sales

 

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