May 01, 2024

“US interest rates continue to dominate FX trading, as yet another sign arrived yesterday that Federal Reserve rate cuts may not come until much later than was previously expected. The FOMC meeting tonight could cause some fireworks, particularly if Chair Powell alludes to the possibility that further hikes cannot be ruled out.”

Tim Hallinan – Trading Director

Main Headlines

On Tuesday, Poland’s government approved a revised plan for allocating European Union recovery funds, adjusting previous proposals to ensure efficient utilisation within the allotted timeframe. The National Recovery Plan aims to facilitate the EU countries’ economic recovery from the pandemic and transition towards sustainable energy. Poland has access to nearly 60 billion euros, comprising 25.3 billion in grants and 34.5 billion in low-cost loans, to support these objectives.

British house prices unexpectedly contracted for the second consecutive month in April, according to mortgage lender Nationwide this morning. Prices slipped 0.4% month-on-month after falling 0.2% in March. The report signalled a moderation in the bounce back in housing market activity of recent months.

GBP

A couple of quiet UK data releases meant that sterling was left to grind lower against both the dollar and the euro yesterday. It posted its fourth consecutive monthly loss against the greenback in April, as markets continued to trim bets for Fed cuts this year while keeping expectations relatively steady in the UK, but it did manage to notch a second marginal monthly gain against the euro. The pound is taking something of a week off from domestic price action – it’s all about the US data for the next couple of days. Mortgage approvals inched slightly higher in March, as expected, to the highest level since September 2022, despite a renewed rise in mortgage rates since the beginning of the year, while consumer lending data printed in the expected range too. We get a final manufacturing PMI this morning, but the Bank of England rate decision next week is where most of the focus is directed.

EUR

The read from yesterday’s data should have boosted the euro, but it was the US labour cost data that ultimately won out in terms of FX impact. The eurozone economy surprised to the upside in Q1, expanding by 0.3% amid a sharp return to growth in Germany and the still solid pace of southern European economies. Headline inflation landed flat at 2.4% but the core figure cooled less than expected from 2.9% to 2.7% – this gave the common currency a modest boost, but under the hood the picture remained tellingly dovish and keeps the ECB primed to cut in June. The downward effect from normalising energy prices slowed considerably, but a downtick in services inflation from 4.0% to 3.7% – the persistence of which had been touted as a significant hurdle to sustained disinflation – was the first in five months and should hand a dose of confidence to rate-setters. Today is a Labour Day holiday in Europe, so it is the US economy under the microscope.

USD

A surge in the Fed-favoured wage gauge in Q1 joined the extensive roster of strong US inflation data yesterday, boosting the likelihood that Powell points to fewer cuts this year or that there is potentially even a hike on the cards this year. The Employment Cost Index ticked up from 1.0% to 1.2% in the three months up to March 2024, driven in large part by compensation growth in the government sector. This was the latest in a relentless flow of accelerating inflationary indicators – the trajectory is unidirectional, and policymakers on the FOMC could be set to take a hawkish turn at tonight’s Federal Reserve meeting. Without a fresh set of forecasts, the dollar’s movement will ride on how cautious the tone is in the statement and the press conference – will they start to rule out cuts until Q4 or even 2025? Could another hike even be put on the table? Or will the softening leading indicators give them hope that inflation could be back on track soon? The consumer confidence survey fell to the lowest since July 2022 yesterday as many more respondents claimed that jobs are ‘hard to get’ – could the labour market finally be loosening?

Markets

Stocks closed both yesterday’s session and the month of April in the red yesterday after a surge in US labour costs in Q1 continued to pile on the downward pressure built on investor sentiment throughout the month as US rate cuts get pushed further back. The S&P 500 is now 4% off its year-to-date peak, although such pullbacks are very common.

Main Economic Events (All Times CET)

10:30am: UK Final Manufacturing PMI
2:15pm: US ADP Non-Farm Payrolls
3:45pm: US Final Manufacturing PMI
4:00pm: US ISM Manufacturing PMI & JOLTS Job Openings
8:00pm: Federal Reserve Rate Decision

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