Weekly Brief

Is the dollar demise set to accelerate?
13 minute read14 April 2023
GBP
It has been another strong week for the pound, with GBP/USD testing the 1.2500 region once again. The move higher has been all the more noteworthy, given that most of the UK newsflow has been on the negative side. Our good friends at the IMF continue to believe that the UK will have the worst performing economy of any G20 country this year, with the economy expected to contract by 0.3%. The figure has been revised sharply higher from the previous semi-annual update from the IMF, an improvement that was not lost on the chancellor, who highlighted that the UK economy has had the biggest upgrade of any major economy from the IMF.
The latest growth figures did not really give much away on whether the IMF are in the right place, with last month’s GDP flatlining, having risen by 0.4% in January. Both Industrial and Manufacturing Production softened, with the former dropping by 0.2% over the past month, against an expected increase of the same level, and the latter flatlining, having been expected to also jump by around 0.2%.
There was some better news on non-EU trade, with the Trade Balance dipping from -£7.25B to -£6.5B. Speaking at this week’s IMF meetings, BoE governor Bailey hinted at changes to deposit protection levels (FSCS) for consumers, with increased levels muted.
It is a big, big week for UK data next week, with inflation and employment data due. Both Headline and core inflation are expected to have declined on an annual basis over the past month, which if true could help to influence the BoE’s outlook on rates. The robust labour market is also expected to persist, with ILO unemployment predicted to remain near the 3.7% region.
Thoughts from the dealing desk
“A reduced week with the Easter Monday bank holiday, but market volatility was undoubtedly not compromised this week! In particular, the US Dollar was under pressure as US inflation fell more than expected in March to 5%, reviving expectations that the Federal Reserve would be able to lower interest rates before the end of the year, which sent investors away from treasuries and the dollar. As a result, we saw GBP/USD jump to the highest level since June 2022. All eyes will be on the UK’s inflation data next week. March’s figure will be released on Wednesday, and another result over 10% may push the Bank of England to continue raising interest rates, which could see a stronger Pound.”
This commentary does not constitute financial advice
-Andrea Efthymiou, Corporate FX Dealing
EUR
The recent trend of a rising Euro has elevated EUR/USD back over 1.1000 this week. As well as being a key psychological level, 1.1000 marked the top of the range for the previous rally, so all eyes will be fixed to see where the single currency goes from here. The upside remains the path of least resistance. The last time that EUR/USD traded over 1.1050 was over a year ago. GBP/EUR has also faltered, despite the stronger pound, reflecting the surging Euro. GBP/EUR moved back below 1.1350 earlier in the week, having remained close to 1.1400 for a while. EUR/JPY is also worthy of a mention, with the pair rising sharply to 147.00, given the softening Yen.
Aside from a broader rally amongst risk assets, which will help to fuel rallies in EUR/USD, much of the rally in EUR/USD has been down to changing rate dynamics between the US and Europe. Markets have been reacting to ongoing hawkish messages on rates from the ECB, coupled with growing expectations that the Fed will likely revert to a series of rate cuts before the year end. History tells us that soon after the Fed stop hiking, the rest of the world are likely to follow, but we are not quite at that place yet.
On the data front, the latest German inflation data confirmed the preliminary release, with key Harmonized CPI rising by 7.5% on an annual basis, which came in much lower than the 8.7% increase recorded over the first two months of the year. There was also a decent jump in regional Industrial Production, which increased by 1.5% during February and 2% annually. Looking ahead, both French and Spanish inflation are reported today, with the key regional inflation data out next week. The rest of the week will see the latest German and region-wide ZEW Surveys released, as well as a batch of PMI data.
USD
It has been a big week for US data, with Consumer (CPI) and Producer Price inflation (PPI), minutes from the latest Fed meeting as well as the release of the latest Retail Sales, which is due out later today (Friday). Of them all, the much-anticipated US CPI report pretty much matched expectations, with annual headline inflation dropping from 6% to 5% over the past month, slightly beating estimates of a drop to 5.2%, and now residing at its lowest level for nearly two years. There was also a paltry 0.1% increase on the monthly headline, which had been expected to have risen by 0.3%. Core inflation was released bang in-line with expectations, with yearly core CPI increasing slightly over the past month from 5.5% to 5.6%. Whilst core inflation still remains frothy, the big drop in headline inflation should eventually pass through to the core readings, according to the smart people amongst us.
A day later, the latest PPI data really caught the eye, given the sharp declines over the past month. Annual core PPI has now declined to 3.4% from 4.8%, with annual headline PPI dropping to 2.7% from 4.9% over the past month, given a sharp drop in the price of gasoline.
The latest Fed minutes were also noteworthy for two main reasons. Firstly, the minutes confirmed that ‘all Fed officials’ backed the FOMC’s ultimate 25bps hike in March. That was perhaps the biggest surprise/takeaway, given that Jay Powell had confirmed there had been much discussion amongst the Fed, on whether they should pause hiking rates given the ongoing banking wobbles at the time. Secondly, the minutes also confirmed that the Fed expect a ‘mild recession’ towards the end of this year. That last part probably most impacted market sentiment most on the evening.
Taking everything into consideration, the latest market-implied odds for the May FOMC meeting see a 25bps hike still dominating, although the market still remains split to some degree. Perhaps more importantly, markets still expect the Fed to cut rates before the end of this year, which may be the case if those recession fears accelerate. The Fed are still telling us otherwise.
As for the dollar, well it has been a challenging week for the greenback with the dollar index (DXY) now trading at just over 100.00. This is a key level, as other than it being a big psychological level, it proved to be the bottom of the range in the previous drop for the dollar during February. However, with US data moderating and the Fed moving towards a probable pause, further dollar declines look the order of the day.
CAD
As expected, the Bank of Canada (BoC) stuck to their guns and maintained the policy rate of 4.25% on Wednesday. The BoC had previously stated that they wanted to assess the impact on the Canadian economy of their cumulative rate hikes, so it was no surprise to see no change from the BoC, despite much stronger economic data of late. In particular, Labor, GDP and Retail Sales data have also seen hearty upside surprises over the past month.
However, the BoC likely had one eye on softening Canadian inflation and worries over the housing market. Much the same as in the UK, the Canadian housing market is overly sensitive to changes in interest rates, given the dynamics of the market. The BoC also published their quarterly Monetary Policy report during Wednesday, in which they projected Canadian inflation to drop to around 3% by the middle of this year, and then reach their target goal (of 2%) by the end of 2024. On growth, the BoC increased their 2023 forecast from 1% to 1.4%.
USD/CAD continues to trend lower, with the pair moving below 1.3400 yesterday for the first time since February. The move has been aided by oil prices, which continue to trend higher on weaker output expectations, after OPEC+’s recent announcement. Looking ahead, next week should confirm further moderating amongst Canadian inflation, with core prices expected to have risen by 4.2% on an annual basis over the past month. That figure is way down from 5.2% previously, and if proved, perhaps giving further evidence that the BOC were correct to stop hiking rates when they did.
AUD & NZD
The latest employment data out of Australia may leave the RBA with a serious headache. Figures released yesterday confirmed that net employment rose by 53K during March, well ahead of the 20k increase forecast. The overall unemployment rate is still down near 50-year lows at 3.5%, which remains hugely impressive.
With such a frothy Labour market, expectations for a strong inflation report have understandably increased, which if proved, may force the RBA to re-assess their recent decision to pause Australian interest rate hikes, after increasing the policy rate to 3.6%. The RBA next meet in early May. The minutes of their last meeting earlier in the month are released next week.
The strong employment data may have helped AUD/USD to rally strongly, with the pair moving from under 0.6650, to over 0.6775 in just two days. However, the weaker greenback is also a key driver. Similar to the Aussie, NZD/USD has rallied sharply, moving back over 0.6300, having been under 0.6200 earlier in the week. For New Zealand, next week’s inflation data is crucial, given the RBNZ’s hawkish stance in the face of surging inflation.