May 02, 2024

“There has been a flurry of activity in FX this week – the dollar slid yesterday as Chair Powell played down the prospects of rate hikes, two rounds of Bank of Japan intervention have wobbled USD/JPY, and we’ve still got the US payrolls to go tomorrow.”

Sam Cornford – Head of Trading

Main Headlines

Foreign direct investment in Europe slumped by 4% in 2023, dragged by a dramatic 12% drop in projects in Germany, according to a survey conducted by EY. European foreign investment has fallen by 14% since its 2017, with firms citing fluctuating energy prices, volatile politics, and EU red tape among the reasons for the downturn.

The Scottish government successfully survived a vote of no confidence yesterday, after First Minister Humza Yousaf resigned earlier in the week following a breakdown of the power-sharing agreement between the SNP and the Greens. With the party in chaos and looking for a new leader, polls show that Labour is ahead in the race for election to Scottish government for the first time in around a decade.

GBP

The Federal Reserve decision guided sterling’s direction yesterday, with volatility picking up late into the session as Powell’s press conference prompted some choppy trading that lifted the pound around 0.4% overall. As mentioned yesterday, a lull in the data calendar means that sterling is relatively defenceless against moves in its peers, so it’s the eurozone and US data in charge until the Bank of England decision next week. A final manufacturing PMI did post some positive news yesterday for the UK economy, as it remained down on the March print but was revised slightly higher to 49.1. The OECD is not as chirpy about Britain’s prospects, however – its latest forecasts point to high taxes and sticky inflation that lay the foundations for the poorest economic growth in the G7 next year.

EUR

A European bank holiday kept liquidity thin in the early part of the session yesterday, but a less-hawkish-than-expected Federal Reserve catapulted the euro to a near-0.5% gain. This morning, it’s the final manufacturing PMI estimate for the eurozone on the calendar which could cause a jolt, although today looks more like an opportunity for EUR/USD to take a breather and consolidate ahead of tomorrow’s US jobs report. The biggest move this morning was a sharp dip in EUR/CHF, after a rebound in Swiss inflation to 1.4% in April made further policy easing in June less self-evident and goes some way towards soothing fears about deflation.

USD

The Federal Reserve press conference dampened the more hawkish expectations for the dollar yesterday, trimming its strength overall after some volatile trading. Policymakers needed to confront the fact that the inflationary trend had become durably stagnant, and the press statement duly tweaked its language to confine progress to the past rather than the present. But the acknowledgement was only brief, and Chair Powell retained his bias to make the next move a cut – it was really framed in terms of cutting soon versus cutting later, with a particularly high bar for including a hike option in the mix. This soothed the worst of investors’ fears, and falling yields knocked the dollar. In the JOLTS Job Openings survey, meanwhile, job vacancies fell to a three-year low and the quits rate fell again, suggesting that a labour market cooling could be on the way soon – some have even suggested that a sneak preview of Friday’s payrolls data might have formed part of the reason for Powell’s dovishness. The data diary is relatively quiet today, but we can expect some fireworks tomorrow afternoon with non-farm payrolls and the ISM services PMI.

In USD/JPY, there was a likely second round of intervention from Japanese officials late last night, which drove a sharp surge in the yen from 157 to 153. Tokyo piggybacked on the dollar’s domestic weakening to maximise the impact, but as on Monday, much of the work has already been undone – so far, traders have simply seen it as an opportunity to buy in to the dip. Intervention can’t change the fundamentals, but it can give a strong warning that pushing beyond 160 won’t be tolerated.

Markets

Equities globally ended much where they started by the close of play yesterday, after surging and falling in choppy trading during the Federal Reserve press conference. Asian stocks have risen so far this morning and US futures point to a rise at the open, while European futures are more mixed. Brent crude oil slipped to a seven-week low this morning, hampered by concerns about demand.

Main Economic Events (All Times CET)

8:30am: Swiss CPI
10:00am: Eurozone Final Manufacturing PMI
2:30pm: US Unemployment Claims
2:45pm: BoC Governor Macklem speaks

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