May 20, 2024

“Slightly lower US inflation spurred a slide in the dollar last week as it reignited hopes that price growth would move back on track and open the door for rate cuts this year. This week, UK CPI is the biggest event in FX, and Thursday’s PMIs will give a fresh insight into the relative growth outlooks in the US, Europe, and UK.”

Tim Hallinan – Trading Director

Main Headlines

Ryanair CEO Michael O’Leary attributed a slower-than-expected growth in airfares to a “recessionary feel around Europe” as the airline reported record annual profits. O’Leary had cautioned two weeks ago that summer fares might not rise as much as the 5% to 10% previously anticipated in late April. On Monday, the airline revised its forecast, predicting flat to modest year-on-year peak summer price growth.

Asking prices for homes in Britain are at record highs despite costlier mortgages, but the 0.8% increase represented a deceleration in the pace of gains, according to Rightmove data out this morning. The average price rose to £375k in the four weeks to mid-May.

GBP

Sterling posted its second-best weekly gain of the year against the dollar on the back of a renewed optimism that the Federal Reserve can cut interest rates a couple of times this year. This week, it’s all about untangling the likelihood of a June rate cut, and Wednesday’s April CPI inflation figure will capture the most attention in this regard. The consensus is for a huge drop from 3.2% to 2.1% which, if confirmed, will likely reinforce the recent tip in the balance from an August first cut to one in June. While policymakers will get one extra print on the day before their June meeting, such a low figure would make standing pat a particularly difficult communication challenge – for that, though, they could rely on a stickier core figure, which is expected at 3.6%. A speech from BoE Deputy Governor Broadbent is the only event today, before his boss Andrew Bailey takes to the podium tomorrow evening, where traders will look to gauge their likely reaction function to Wednesday’s CPI dip.

EUR

A flagging dollar has the euro consolidating near a two-month high this morning, and holidays in France and Germany have thinned the diary for today. Big events are coming up this week, however, with a speech from ECB President Lagarde ahead of some PMIs on Thursday morning. The growth outlook has been a tailwind for the euro recently as the eurozone has emerged from its seven-month slump wallowing below the 50.0 mark in the composite PMI index – indicating declining activity – and inched up to 51.7 in April. This tepid recovery can partly explain a recent bout of cautiousness from ECB speakers, with Schnabel last week for example stressing the risks that the ‘last mile’ remains difficult and bumpy after the June cut, as in the US.

USD

Last week was one to forget for the dollar, and it only took a slight downside miss on expectations for CPI for markets to latch on to renewed hopes for two rate cuts towards the end of this year, and to take a near 1% chunk out of the greenback’s strength. Next week’s core PCE print is the next majorly consequential data point for traders, but this week it’s Fed speakers and some PMI data on the docket. No less than six Fed officials come this afternoon – we’ll see if they have taken on the market’s exuberance or, more likely, they maintain a tone of caution against diving into rate cuts prematurely. Unlike for the euro, slowing business activity in the PMIs have been something of a tailwind for the dollar over the past few months as a moderate convergence in the growth outlooks have trimmed the US’ growth advantage, although the consensus this week is for some improvement.

Markets

Stocks cooled somewhat towards the end of last week once rate cut optimism had subsided, but the net result was a week in the green for the major indices, punctuated by some fresh record highs in the US, UK, and eurozone. Mining companies are the big winners this morning, lifted by all-time high surges in gold and copper, while oil stayed steady as markets absorbed the news about the Iranian President’s helicopter crash.

Main Economic Events (All Times CET)

1:01am: UK Rightmove House Price Index
11:00am: BoE’s Broadbent speaks
2:45pm: Fed’s Bostic speaks
3:00pm: Fed’s Waller speaks
4:30pm: Fed’s Jefferson speaks

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