May 08, 2024

“The dollar has retraced a portion of its losses over the past few days as markets have had time to mull over the Fed’s interest rate trajectory. The Bank of England tomorrow is the event we are all waiting for, and until then Federal Reserve speakers take centre stage.”

Tim Hallinan – Trading Director

Main Headlines

TikTok and its Chinese parent company ByteDance filed a lawsuit in US federal court on Tuesday, aiming to block a law signed by President Joe Biden that mandates the divestiture of the popular app to avoid a US ban. The lawsuit asserts that the law violates several aspects of the US Constitution, including First Amendment free speech protections.

Britain announced on Wednesday that it is investing nearly £200 million to construct Europe’s inaugural facility for producing high-assay, low-enriched uranium (HALEU). The move is part of the attempts to achieve climate objectives and enhance energy security. By 2050, Britain aims to elevate its nuclear power capacity to 24 gigawatts, approximately a quarter of projected electricity demand, up from the current 14%.

GBP

Sterling has slipped by 0.8% against the euro in the last week as hopes build for earlier rate cuts from the Bank of England. Over the past month, expectations for the timing of the first British rate cut compared to the Fed have swung from a likely lag that keeps sterling well bid to a summer cut that comes a solid few months earlier than in the US. A large part of this is down to dovish commentary from Bailey and Ramsden, which has accompanied a catch-up in disinflation versus the US. Speculative traders built up their short positions – bets that pay off if the pound weakens – to the highest level since January last year, having been in a stretched long position only a month ago, according to the CFTC. A finetuning of the rates outlook following the Bank of England’s decision is set to provide the next jolt tomorrow.

EUR

With little to swing the markets yesterday, the euro eased modestly as the dollar regained its footing through the session. Eurozone retail sales posted one of the most impressive monthly figures in over a year yesterday to hand the common currency a temporary boost at 0.8%, adding to the mounting evidence that the economic outlook is improving across the bloc. Today, German industrial production beat forecasts but still contracted by 0.4% on the month, while the focus is likely to be on a couple of ECB speakers who will likely continue to throw out individual rhetoric on the likely rate path after a first cut in June. Elsewhere on the continent, EUR/SEK has surged more than 0.5% after the Riksbank cut its policy rate by 0.25% for the first time in the cycle and pencilled in two further cuts in the second half of the year, provided that inflation stays as low as policymakers are expecting.

USD

The dollar has inched higher through the start of the week, regaining some of its bullish momentum after a dovish Fed and a soft jobs report dented the greenback last week. As suggested yesterday, Fed speakers have begun to arrive with some hawkish pushback from the cut-focused Powell press conference last week. The most notable event yesterday was a speech by the Fed’s Kashkari, who upped his estimate of the ‘neutral’ interest rate – where rates should settle in the long term to keep inflation stable – from 2.0% to 2.5% and contended that there may not be any rate cuts this year. Although not a voter on the FOMC, it seems to have made some impact in FX and helped to shore up the dollar. A data-light calendar shines a light on commentary from Jefferson, Cook, and Collins today.

Markets

The upward momentum in stocks cooled off yesterday, as the markets calmed in a brief lull in the macroeconomic data calendar ahead of the Bank of England’s rate decision on Thursday and US CPI next week. Japan’s Nikkei was the exception, however, benefitting from fresh yen weakness making the stocks cheaper for foreign investors.

Main Economic Events (All Times CET)

10:00am: Italian Retail Sales
5:00pm: Fed’s Jefferson speaks
7:30pm: Fed’s Cook speaks

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