Weekly Brief

Is it the end of the dollar rally?

8 minute read


Although it has been a challenging week for markets, the pound has actually fared pretty well. GBP/USD started the week at just over 1.2200, and by the time of writing had broken back above the 1.2500 resistance zone.

UK economic Data has probably lent a hand, with the latest inflation reading taking much of the headlines, reaching a dizzy high of 9% (YoY/Apr), and that figure is expected to go even higher over the summer. However, markets had been expecting a jump of 9.1% on the headline. Whilst there was better news on the jobs front, with ILO unemployment slipping to 3.7%, which is nearing 50-year record. The number of available vacancies in the UK is now outstripping the number of people unemployed. That may sound great, but the belief here is that jobseekers are holding out for higher wages to offset the increase in the cost of living, so the UK could be heading towards a wage-price spiral. This unwelcome phenomenon causes further upside pressure on inflation.

So, was that why the pound ended up rallying higher? To a degree, however, the rally in cable may have much more to do with the dollar side of the pair. With markets now becoming far more fixated over the prospects for global growth, worries over a potential recession and stagflation, the worry is that the Fed may not now ultimately be able to deliver on their projected U.S rate hikes (see USD). Much of the earlier decline in GBP/USD can be attributed to that widening interest rate differential between the U.S and UK. If this narrows, then there will be much more of a level playing field.

In the meantime, the latest UK Retail Sales have just been released this morning, and there has been another welcome boost with Retail Sales jumping 1.4% during last month (MoM/Apr), against an expected decline of around 0.2%. That gives the yearly decline a slightly healthier look, with only a 4.9% decline overall, versus an expected drop to 7.2%. Baby steps.


The single currency has been quietly finding its feet, after the big sell-off in EUR/USD throughout April. Recent economic data for the region has helped to underpin the moves, with stronger growth and higher inflation having a notable impact. On the growth side, a 0.3% (QoQ /Q1) gain might not sound like much, but it beat estimates and put the yearly rate at 5.1%, even if the ECB have recently revised 2022 growth projections lower, given the impact to the region from the war in Ukraine.  Inflation for much of the region is nearing UK levels.

Those inflation worries are stirring much debate amongst Euro-area officialdom, with the likes of Dutch central bank chief (and ECB member), Klaas Knot, opening the door to the possibility of a larger rate hike from the ECB at their July meeting. This obviously caught the eye of markets, as a mere 100pips of rate hikes have been priced in so far. Any sign that the ECB might all of a sudden become much more aggressive on rate hikes could catch the market somewhat under-priced.

This takes us back to EUR/USD, which has moved from a 1.0350 low to 1.0600. This may not exactly resemble a major rally just yet, but much like as we said with GBP/USD, much of the earlier decline here has been down to interest rate projections. If they narrow over time, then this EUR comeback may have a greater chance of longevity.

With EUR/USD and GBP/USD playing to a fairly similar tune of late, this has resulted in a partial neutralisation in moves for GBP/EUR. A broad range of 1.1600 – 1.1900 persists, with that rally in GBP/USD helping to push the pair to the top side of the range, but we are still well below the 1.2000 region, which characterized sterling’s advantage in April.


What has happened to the dollar? Although the greenback benefitted from a risk-off environment earlier in the week, the dollar index (DXY) has since slipped back to reach a two-week low and is heading towards support at 102.20, which if broken, could herald further declines for the dollar. The Bond market may be playing a key role, with a demand for quality assets pushing the yield on the U.S 10-year Treasury back down to 2.81%*, having peaked at 3% just this week. In the case of USD/JPY, that broader risk aversion has resulted in a move back below 127.50, as the pair gradually declines from the recent peak at over 130.00.

As we have highlighted above and before, markets are now getting ever-more worried about the potential for global growth, and in that environment, will be far more sensitive to any perceived weakness of economic data. The U.S Housing market is one area of concern. The most recent inflation data highlighted the jump towards rental properties, as new home buyers baulk at the increase in long-term borrowing costs. This week’s Housing data will add to the worries, with a slowdown in both Housing starts and Existing Home Sales. Initial jobless claims have also started to increase, and this week recorded their highest level since January, despite Continuing Claims hitting the lowest levels since the 1970’s. The latest Retail Sales were one bright spot, although it remains questionable if that run can continue.

The Fed have continued to wax lyrical about the prospect of further 50bps rate hikes over the coming months as they keep a sole focus on talking inflation, however, they have also said that any hikes will be entirely data dependent. Let’s just hope that the data is on their side, or the recent talk of stagflation could intensify on the other side of the pond, and leave the Fed with a difficult choice to make. In the meantime, the latest U.S growth figures, which are out next week, will be closely monitored by markets.

*Bond yields and prices move in opposite directions.


Canadian Inflation caught our eye this week, with core inflation reaching the dizzy heights of 5.7% (MoM/Apr). That beat estimates of 5.4% by some margin. The headline figure of 6.8% marks an unwelcome 31-year high too, although still well below the likes of the UK (see GBP). The main drivers to the increase were Food and Shelter (Housing), with the former rising just shy of 10% (YoY) and the latter up 7.4%. On the positive side, gas prices eased slightly, but it is the recent acceleration in the core level that will have the BoC worried.

Talking of which, the next BoC meeting is on the 1st June. Economic data has supported another 50bps rate hike by the BoC, with the latest growth figures beating estimates by some margin, giving the BoC plenty of wiggle room, for now. It is the ‘for now’ bit that has everyone worried, as any perceived weakness could impact the BoC’s expected hiking profile.

For the Loonie, well the spot price of Oil has remained stubbornly above $100pbl, and that has lent support. This, combined with some greenback wobbles (see USD) has resulted in USD/CAD moving back down to just below 1.2800 yesterday. GBP/CAD moved as low as 1.5800 earlier in the week, but that rally in the pound has helped lift the pair back towards 1.6000.


Both the Aussie and Kiwi have made steady gains against the greenback throughout this week. AUD/USD broke back above 0.7000 (and has stayed there), after tapping 0.6830 this time last week. NZD/USD moved back over 0.6400, after threatening a break under 0.6200 previously. On the data front, this week’s Australian employment report was a mixed bag really, with April employment increasing by 4K, versus a 30k expectation. The overall unemployment rate dropped to 3.9%. However, the latest wage inflation numbers gave the Aussie a lift.

Looking ahead, next week is all about the Kiwi, with the latest RBNZ meeting and Retail Sales due out in New Zealand. The RBNZ appear poised to hike rates by 50bps, as they look to front-load their rate hikes, in a bid to diminish the prospect of somewhat more challenging hikes further down the road.  


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