May 22, 2024

“UK inflation did not fall as much as economists were expecting in March, and this has markets pricing out the probability that a first rate cut arrives next month. This has sterling at a two-month high against both the dollar and the euro. US Fed minutes and the PMIs are the next focus for traders.”

Tim Hallinan – Trading Director

Main Headlines

In a Reuters/Ipsos poll closed on Monday, US President Joe Biden’s approval rating fell to the lowest of his presidency, last reached in July 2022. Despite US growth outperforming the majority of its peers, few appear to be feeling the benefit and only 36% of Americans approve of his performance in the job, down from 38% in April.

The New Zealand dollar surged nearly 1% before retracing a significant proportion of the move, after the Reserve Bank of New Zealand held rates steady but upped their forecasts for the end-2024 interest rate from 5.6% to 5.7%, owing to particularly stubborn inflation.

GBP

A smaller-than-expected fall in UK inflation has propelled sterling to a fresh two-month high this morning. It slipped quite dramatically from 3.2% to 2.3% but beat more optimistic estimates for a 2.1% print. While it will not inject as much rate cut enthusiasm as was hoped, it is an undoubtedly encouraging figure for the Bank of England and, importantly for sterling, the UK economy has now fully transitioned from being the obvious laggard in terms of rate cuts, to now having a lower CPI rate than the US or the eurozone. But the elephant in the room here is that the headline is flattered by a transitory boost from a 27% reduction in the energy price cap – little progress has been made on the underlying components that policymakers are concerned could keep inflation sticky. Service inflation barely budged at 5.9%, and core inflation is still almost twice the bank’s 2% target. Traders have clipped the swap-implied probability of a June cut as a result, boosting UK gilt yields. Looking ahead, a speech from the BoE’s Breeden is on the calendar this afternoon and the PMIs arrive tomorrow morning.

EUR

In the absence of any market-moving news out of the eurozone, the euro has drifted slightly lower against the dollar and slumped to a two-month low against the rising pound this week. Lagarde seemed confident when she spoke about the high chances for a June cut yesterday morning, but markets have only become more cautious about the trajectory from July onwards. The two-year German Bund yield – a reflection of short-term interest rate expectations – is back above 3.00% this morning, having risen more than 14bps over the past week. The next focus for the single currency is tomorrow’s PMIs, where the consensus is for another marginal improvement in the eurozone’s growth outlook, which has been lifted back into positive territory over recent months.

USD

The economic calendar kicks back into gear today, with the dollar so far tracking rising Treasury yields higher amid a news chasm early in the week. Waller called for ‘several more’ months of good inflation data before obtaining the confidence to cut rates, but stressed that further hikes were likely unnecessary and maintained faith in policy working to depress demand. This was hardly a shocking view, however, and did not lead to any significant moves. The highlight today comes later in the evening with the FOMC meeting minutes from three weeks ago. The risks lean dovish here – policymakers did not have last week’s softer jobs or CPI prints at the time, so any more hawkish commentary can be brushed off with the recent data, while a more dovish stance could boost bets for rate cuts further. There is some home sales data too this afternoon, and there is a decent chance that Nvidia Q1 earnings move FX. Upbeat Q4 earnings sent equities soaring earlier this year, and a repeat could hand a boost to the likes of euro, sterling, and the more risk-sensitive currencies in the G10 (AUD, SEK, NOK etc).

Markets

US AI poster child Nvidia’s earnings arrive after the bell tonight and are the main focus across asset markets today. US stocks have inched up ahead of the release, the last of which added hundreds of billions in market cap and sent pro-cyclical currencies rallying on boosted sentiment. The FTSE 100 has erased yesterday’s gains this morning after UK CPI stayed stickier than expected.

Main Economic Events (All Times CET)

4:00am: Reserve Bank of New Zealand Rate Decision
8:00am: UK CPI Inflation
10:30am: UK House Price Index
2:45pm: BoE’s Breeden speaks
4:00pm: US Existing Home Sales
7:00pm: US FOMC Meeting Minutes

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