May 30, 2024

“Weakened risk appetite is weighing on the more risk-sensitive currencies in the second half of this week versus the dollar, although sterling is reaching new peaks against some of its peers on the crosses. US GDP and unemployment claims are the highlight today ahead of tomorrow’s calendar packed with inflation data.”

Sam Cornford – Head of Trading

Main Headlines

The IMF has upgraded its growth forecasts for China by 0.4 percentage points to 5% in 2024 and to 4.5% in 2025, following a strong first quarter and recent government stimulus hoped to ease persistent issues around leverage in the ailing property sector. The supranational organisation argued that more comprehensive action would be needed, however.

The Evening Standard, a staple of London’s media landscape for nearly 200 years, announced it will transition from a daily to a weekly print format after incurring significant losses. Interim Chief Executive and Chairman Paul Kanareck explained to staff that shifts in commuting patterns, increased remote work, the availability of Wi-Fi on transport networks, and alternative content sources for commuters necessitated this change.

GBP

Dollar strength aside this week, sterling is performing remarkably well on the crosses after a shift in rate cut expectations since last Wednesday’s hotter-than-expected services inflation. The June cut has become September, and markets now price a similar number of rate cuts as the Fed and around half of the amount expected in the eurozone. The pound touched a 21-month high against the euro yesterday – its highest level since before the Truss mini-budget era – after hitting a 16-year high against the yen only the day before. Sterling’s newfound strength sits on potentially weak foundations, however – the risk here is that this severe rates adjustment could unwind relatively rapidly if services inflation gets back on track, or if policymakers lean towards rate cuts anyway. There is no UK data on the docket today, so traders will be fully focused on the US this afternoon.

EUR

Inflation data so far this week has had relatively little impact on the euro, largely leaving it to suffer from a rising US Treasury yields. German inflation rose more than expected to 2.8%, although there was a brief dip in the euro after some of the softer regional data earlier in the morning. This morning, the end of energy subsidies in Spain lifted the figure to slightly higher than the forecast at 3.8%. The eurozone-wide figure tomorrow morning will likely have the most impact on the ECB’s post-June rate path – there is little that would prevent a rate cut next week now – where the speed of further cuts is up in the air.

USD

Soaring US Treasury yields are dragging the dollar index higher and putting a dampener on risk sentiment across assets this week.  A third weak bond auction spooked investors again yesterday, with the 10-year yield rising 16bps in only two days, spurring a safety bid as equities sold off and higher-for-longer rate fears jumped. This has broadly benefitted the typical safe havens (USD, CHF, JPY) at the expense of the risk-sensitive G10. Today, we get the second revision to the 1.6% Q1 GDP print, where the forecast is expecting a hefty downward change to 1.2% in what would be a starkly weaker first quarter for the US economy. Unemployment claims and pending home sales complete the calendar this afternoon, and all eyes are on the Fed-favoured core PCE inflation print tomorrow.

Markets

Stocks continued to head downwards across the globe yesterday with many indices falling around 1%, as a fresh rise in Treasury yields spooked equity investors and dampened appetite for riskier assets. Futures point to a weak open on Wall St today.

Main Economic Events (All Times CET)

9:00am: Swiss GDP q/q
9:00am: Spanish Flash CPI
2:30pm: US Prelim GDP q/q
2:30pm: US Unemployment Claims
4:00pm: US Pending Home Sales
6:05pm: Fed’s Williams speaks

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