FX Moves
USD
The dollar caught a bid on Wednesday with the DXY index rising 0.3%. While the greenback’s climb was initially triggered by renewed concerns around inflation persistence following hot UK CPI data, a dynamic that saw Treasury yields grind higher in sympathy with Gilts and other core rates, it was Fed meeting minutes released yesterday evening that helped solidify the move higher. Admittedly, in our view the minutes offered little new information for markets, with this latest release largely echoing recent commentary from Fed speakers. Nevertheless, traders seemingly took comfort from a note that meeting participants assessed it would take longer than previously anticipated to gain greater confidence in inflation moving sustainably to 2%. With this largely confirming the Fed’s high for longer stance, in line with current market pricing, only a handful of Fed speakers and flash May PMI numbers remain as the primary greenback risk events for this week. The latter specifically, while not ordinarily market moving, did trigger a notable dollar selloff last month on fears that the US economy is starting to slow. As such, markets will likely be paying closer attention than usual to the US PMI figures released later today, looking in particular for any further signs of economic slowdown, an outcome that could reverse yesterday’s DXY strength. Even so, we suspect that events in Europe will likely be at the centre of market attention today, with a snap UK general election, European PMIs and eurozone negotiated wage data all set to be key themes for markets in what looks likely to be a busy trading session.
GBP
CPI might have managed to steal the headlines for all of a few hours, but by yesterday lunchtime media speculation around a snap general election to be held on July 4th was dominating the airwaves. All told, that saw yesterday’s inflation overshoot take a back seat for markets, as pre-election jitters largely cancelled out what should have been a sterling supportive set of prints. Ultimately, this meant that GBPUSD finished yesterday’s trading flat on the day, an outcome that belied the session’s choppy price action. Taking a step back however, we are inclined to view yesterday’s developments as broadly sterling positive. The services CPI overshoot saw markets almost entirely price out a June start date for BoE easing, aligning markets with our longstanding call for a first rate cut in August. Opinion polling, meanwhile, lies in the sweet spot for sterling. The Labour party has a large enough lead to guarantee a stable majority, an outcome that we suspect will be favoured by markets over risks of a hung Parliament or a Conservative extinction event. Combined, we expect these factors should see the pound trade with a modest bid this morning as markets continue to digest yesterday’s developments, a dynamic that could be further supported by flash May PMIs, if yet another strong reading is received, with these set to be published at 09:30 BST.
EUR
The euro eased modestly against the dollar yesterday, down 0.3% in advance of today’s pivotal data releases. In fact, markets will not only get to see flash May PMIs, but also Q1 negotiated wage data. When it comes to the former, traders will be looking for any hints on wage passthrough, given that this was a notable feature of the April PMI reports, and a concern for those at the ECB worried about sticky inflation. It is negotiated wages, though, that we expect will be key for euro traders. Indeed, this is the data point that for months, ECB speakers have conditioned their easing path on. While country level indicators have suggested relatively modest settlements across France, Spain and Italy, German data released yesterday came in stronger than expected at 6.2% YoY in Q1, suggesting that risks are skewed towards the ECB receiving an uncomfortably high reading. Although we doubt that this would derail June rate cut given the consistency of ECB speakers on this in recent months, an unexpectedly high print could see a reassessment of the ECB’s easing path through the second half of the year. Admittedly, we still continue to think that the slowest likely pace for ECB easing is one cut per quarter even if today’s data does land hot, suggesting three rate cuts this year in total - more than the 2.5 cuts priced by swap markets. Nevertheless, an upside surprise today would almost certainly see a knee jerk reaction from markets to further price out rate cuts in H2, temporarily boosting the euro in the process.
CAD
The loonie once again underperformed other G10 currencies through Wednesday's trading, with USDCAD rising 0.45% as markets continued to parse Tuesday’s inflation data. Perhaps surprisingly, despite all key CPI indicators now lying below the 3% top end of the BoC’s tolerance band, market expectations for a June rate cut still only stand at 62%. As we noted yesterday morning, we think markets continue to underestimate the degree of policy loosening that is likely over the coming quarters, with traders still reluctant to price in significant divergence between the BoC and the Fed. Even so, economic fundamentals favour a June rate cut, a view we suspect is now shared at the BoC. Indeed, back in April Governor Macklem suggested all that was needed to start cutting rates was some further confirmation that inflation has been tamed. Since then, data has offered little signal to the contrary, suggesting to us that there remains scope for a further dovish reassessment on Canadian rates, a dynamic that should continue to weigh on the loonie.