May 03, 2024

“FX is fully focused on today’s non-farm payrolls report and its impact on the Federal Reserve’s likely trajectory this year. A soft number could accelerate the dollar’s frail momentum this week, while further evidence of a strong labour market could unwind some of the post-FOMC weakness.”

Tim Hallinan – Trading Director

Main Headlines

Apple beat forecasts in its Q1 earnings release yesterday, posting a smaller-than-expected decline in sales while promising a brisk return to growth. The tech giant also announced a $110bn buyback as its shares surged by 6%.

Forecasts from the OECD released yesterday indicated that the UK economy would grow at one of the slowest rates this year among advanced economies, slashing its projection from 0.7% to 0.4%. It then expects its performance to lag the entire G7 in 2025, recovering only to 1.0% compared to the 1.2% predicted in February.

GBP

Despite a brief dip yesterday afternoon, sterling has held on to its post-FOMC gains against the dollar while slowly grinding lower against the euro. Today, the whole market is riding on the US non-farm payrolls report this afternoon and what this will do for yield spreads. Any changes to the final services PMI this morning could move the dial modestly for the growth outlook, but a big surprise is unlikely, and the US rate path should drive sterling today. Local elections yesterday point to wide losses for the Conservatives, although this is of little surprise to investors. Domestic triggers for the pound are on hold for now as traders gear up for the Bank of England decision next Thursday, where the official line of communication and a fresh set of forecasts could help to clear up the bank’s inflationary outlook.

EUR

The euro bounced following 0.4% slide yesterday as it eked out further gains against the dollar. The final manufacturing PMI print yesterday edged up very slightly but was finalised at a four-month low for the bloc with a notable downward revision in Italy. The ECB’s Stournaras has spoken this morning, saying that policymakers are likely to cut rates only three times this year given the prospects of stronger-than-expected economic growth. The eurozone calendar is data-light today other than a reading of the unemployment rate, although a potential surprise in US non-farm payrolls has the common currency primed for a sizeable move.

USD

Powell’s dovish tone from Wednesday evening has knocked the US dollar some 1.1% off its year-to-date peak before the rate decision. This soft momentum is set for a key test with the headline non-farm payrolls report this afternoon – the consensus is looking for a 238K print here and the lowest figure since December. Business surveys – including the NFIB small business index and the PMIs – and a falling quits rate are signalling a cooling off in the labour market that should emerge in the hard data in the near term, with hiring plans slowing and vacancies contracting in the first quarter. The markets seem to have a bias for selling the dollar right now and the Bank of Japan seems keen to piggyback on any downward momentum, so the arrival of a softer figure this month could catalyse another big drop in the dollar and build on the rates moves from the past few days. But the US economic data has a habit of defying calls for weakness, and it has surprised on the upside for five consecutive months, remaining a source of dollar strength through that time. The ISM services PMI is expected to reinforce the case for a strong economy later in the afternoon, with forecasts pointing to a 52.0 read.

Markets

Equities were buoyed yesterday as markets digested the Powell’s more-dovish-than-expected commentary from the FOMC decision, boosted also by a revenue decline at Apple that was smaller than expected. According to the LSEG, 77.2% of the 373 companies in the S&P 500 to have released quarterly earnings have beaten analyst expectations so far.

Main Economic Events (All Times CET)

10:30am: UK Final Services PMI
11:00am: Eurozone Unemployment Rate
2:30pm: US Non-Farm Payrolls, Average Hourly Earnings, & Unemployment Rate
3:45pm: US Final Services PMI
4:00pm: US ISM Services PMI

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