May 07, 2024

“The US dollar took a double blow last week from a cut-focused Federal Reserve and a softening in the labour market. The Bank of England and the return of Fed speakers are on the radar this week, with the pound set for a big day on Thursday.”

Sam Cornford – Head of Trading

Main Headlines

The Australian dollar sank by 0.5% this morning despite the Reserve Bank of Australia holding rates steady at 4.35% and revising inflation forecasts upwards, as it opted not to restore its bias towards hiking interest rates again after inflation inched higher in the first quarter and the labour market remained strong.

Britain’s Liberal Democrats said yesterday that the party would submit a motion of no confidence in Prime Minister Sunak’s government, in an attempt to trigger a June general election following severe losses for the Conservatives in local votes last week. According to the BBC, the ruling party lost 474 local council seats while Labour and the Liberal Democrats gained 186 and 104 respectively.

GBP

The Bank of England decision on Thursday is the natural highlight for sterling after it squeezed out a 0.4% gain last week against a sagging dollar. The data today is limited to the construction PMI, where the consensus is an uptick to 51.1. Instead, the monetary policy report is front of mind, after British rate-setters spent the last month confusing markets with contradictory outlooks for either a near-term move to the 2% target that puts cuts in play, or heightened risks that inflation becomes an embedded dynamic in the UK economy. Investors will be keen to find some clarity from the official line of communication.

EUR

The euro is in consolidative mode this week after capitalising on softer US developments last week, and will primarily rely on cues from the foreign economic calendars over the next few days. An upward revision to the final services PMI read for April to 53.3 – the highest since May 2023 – and a seventh consecutive month of improvement in investor confidence in the Sentix survey gave some positive signals for the eurozone cyclical outlook yesterday, although it failed to hold on to any initial gains made against the dollar. A couple of low-tier economic data points this morning include a 0.4% contraction in German factory orders and a 0.2% increase in French private payrolls, ahead of a retail sales print in a few hours’ time.

USD

A less-hawkish-than-expected Federal Reserve meeting and a softer non-farm payrolls release put worries about a further rate hike to bed last week, trimming the dollar’s strength by 1% and nearly fully reversing the hawkish repricing triggered by last months blowout 3.5% CPI release. The narrative of divergence between the ECB and the Fed that had catalysed an expanding gulf between US and eurozone rates last month suffered a double blow, firstly as Chair Powell kept his sights firmly on  rate cut as his next move, and then as the US economy added a milder-than-expected 175K jobs in April. The jobs report looked less like stagflation – a term which had surfaced after GDP growth fell to 1.6% in Q1 – and more like goldilocks, hence the sharp rally in US equities. It was soft but not too soft, pointing to a long-awaited cooling off in the labour market while remaining reasonably strong. The US 2-year yield fell 14bps immediately after release and markets upped their expectations for rate cuts this year to almost two. The data is mostly quiet until next week’s CPI release, but with the rate decision blackout out of the way, Fed speakers are set to return to the podium, with Jefferson, Cook, Daly, and Barr amongst those speaking this week. Chair Powell leaned dovish at the press conference, but he has often exhibited a stronger bias to cut rates than his colleagues, who may again provide some hawkish pushback that buoys the dollar.

Markets

Rate cut optimism and lower yields catapulted global equities on Friday and Monday as the soft non-farm payrolls report handed the S&P 500 its best day in over two months. The standout performer recently has been Hong Kong, where stocks are on their best run since 2018, having surged 15% in ten straight days in the green. Futures point to a catch up in the FTSE 100 at the open this morning after yesterday’s bank holiday.

Main Economic Events (All Times CET)

6:30am: Reserve Bank of Australia Monetary Policy Statement
7:45am: Swiss Unemployment Rate
8:00am: German Factory Orders
9:00am: Swiss Foreign Currency Reserves
10:30am: UK Construction PMI
11:00am: Eurozone Retail Sales
4:00pm: Canadian Ivey PMI

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