May 23, 2024

“Sterling had a busy day yesterday, rallying through a strong day for the dollar as inflation surprised to the upside and Sunak announced an election. With the PMIs in the diary today, the focus will be on transatlantic growth conditions and the possibility of further convergence between the US and Europe.”

Sam Cornford – Head of Trading

Main Headlines

British Prime Minister Rishi Sunak called a surprise July 4^th general election vote in a rainy speech outside of No. 10 last night, triggering a frantic six-week campaign period for he and his rival Keir Starmer at the Labour Party. Labour have been sitting around 20 points ahead of the conservatives in the opinion polls for most of this year.

AI behemoth Nvidia surged around 6% before retracing a big proportion of the move in afterhours trading, after earnings beat estimates and executives gave another bullish forecast on quarterly revenues.

GBP

A stickier-than-expected CPI inflation print kept sterling firm in the face of a dollar on its best daily run this month, and it now sits within a whisper of a nine-month high against the euro this morning. The pound has benefitted from a strong hawkish repricing as traders have trimmed the probability for a June cut from 60% to near zero and now price less than two full rate cuts before the end of the year. While the headline inflation figure fell to just above 2% yesterday, it was the 5.9% services inflation that had markets spooked that fully quashing domestic inflationary pressures could take longer than expected. The extent and conviction of the move leaves sterling vulnerable to a pullback if the data turns in the right direction for the Bank of England next month, however. The news of a snap general election in six weeks naturally caught the eye of investors too, but inflation dominated the price action and is likely to continue to do so over the campaign period. Although it injects an extra layer of uncertainty, which has been reflected by a boost to implied volatilities in the options markets, markets have been inclined to trust in Labour’s 20-point lead in the opinion polls and few are expecting any big surprises that could bring politics to the forefront of FX. Today, the main data point is the PMI surveys, which have been supportive for sterling so far this year as the UK economy has returned to growth – the consensus is for a flat composite figure.

EUR

Business activity and negotiated wages are the highlight for the euro today, which has fallen nearly 0.5% against a recovering dollar this week. The PMIs have been a mixed bag so far this morning, with French services slipping back into contraction and hurting the overall figure, while Germany has notched some solid improvements across both the services and manufacturing sectors, although the latter remains well into contractionary territory. The bloc-wide figure arrives this morning, where the consensus is for a slight improvement amid further convergence in growth conditions to the US. The easing in the US growth advantage this year has shielded the euro from further rates-induced weakness, and kept EUR/USD buoyed far above the levels of last autumn. Markets are looking for a softer negotiated wages report too today, which policymakers had touted for a while as the key decider in a possible June cut. Various speeches have backed the ECB into a corner since then, however, and the bar is relatively high for a strong figure to put a rate cut on ice.

USD

Rising US Treasury yields are dragging the US dollar higher as markets have reverted to pre-CPI expectations for rate cuts. The latest hawkish boost came from the Fed meeting minutes from earlier in the month, before non-farm payrolls and April CPI both surprised to the downside. Central bankers were relatively confident that monetary policy is in the right place, but there was appetite among many to hike rates further if inflation continues in the wrong direction. It has been evident from speeches since that the weaker data since then has softened this stance, however. Like the UK and eurozone, today’s headline is the PMI survey data later this afternoon, where traders will be looking for further signs of cooling in the US economy that could lead to easing inflationary pressures over the coming months.

Markets

Most stock indices were in the red by the close of play yesterday, after a hawkish set of minutes put the ‘higher-for-longer’ narrative back at the forefront of traders’ minds and tensions in Taiwan hurt Asian stocks this morning. Nvidia’s earnings beat estimates in Q1, and a pass through of positive risk sentiment into today’s open could give Wall St stocks a positive session.

Main Economic Events (All Times CET)

9:15am: French PMIs
9:30am: German PMIs
10:00am: Eurozone PMIs
10:30am: UK PMIs
2:30pm: US Jobless Claims
3:45pm: US PMIs
4:00pm: Eurozone Consumer Confidence

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