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US Dollar loses ground as markets adjust UK and EU rate prospects

Last week we saw Sterling retrace some of the losses it made against both the US Dollar and Euro. The big move from the Sterling raise was following the positive employment data release. UK unemployment fell to its lowest rate in nearly half a century in the first quarter of 2022, as the number of job vacancies rose to a new high of 1.3m. In addition, some sectors such as construction and financial services benefitted from bonus payments as firms put up pay to recruit staff, the ONS said. This saw total pay, which includes bonuses, rise by 7% between January and March, keeping pace with rising prices. Following this, we saw inflation rising from 7.0% to 9.0% in April, slightly below expectations for 9.1% (the first undershoot in seven months) but nevertheless the highest since the CPI series began (40 years ago). The more favourable salary growth combined with record high inflation resulted in the market readjusting its forecast for the implied interest rates by the end of the year. Prior to the labour that the market was seeing an implied rate of circa 2.00% for December; by the end of the week this was circa 2.25%.

It was a quieter week for the US. The Fed’s messaging is clearest with its policymakers united in indicating that for now they are more concerned about inflation and that, as result, 50 basis point increases in interest rates are likely in both June and July. Given the sentiment there is very little that will change the market’s sentiment here. The US retail sales rose by 0.9%, slightly below expectations but still solid. Consumers bought more motor vehicles amid an improvement in supply and increased spending at restaurants, providing a powerful boost to the economy at the start of the second quarter. The updated figures continued to support the Fed’s aggressive tightening policy projections, having already embarked on a tightening cycle and vowed to hike borrowing costs aggressively.

In the meantime, the Euro found some support early in the week on hawkish signals from the European Central Bank (ECB) governing council members as officials commented that the central bank will shortly start hiking interest rates in an attempt to stave off rising inflation. Dutch Central Bank chief Klaas Knot commented that the policymakers should not rule out a 50-basis point hike in July, Current market expectations are for the policymakers to raise the deposit rate by 90-basis points this year, which would suggest that four 25-basis point rate hikes may be on the cards.

Will PMI data rebuke slowdown in March?

The market continues to remain dovish with regard to the growth outlook with many concerned about a looming recession given the current cost of living crisis. It is slightly quieter in terms of economic data with the most interesting releases being the ‘flash’ estimates for the May manufacturing and services PMIs on Tuesday. Whist there is evidence of slowing growth in the past couple of months, partly as post-Omicron impetus begins to fade, both sectors are expected to show continued growth. In addition, the monthly UK public finance data, also Tuesday, may be primarily watched for indications of the leeway for the government to offer extra support to households.

Dollar loses ground as focus turns to FOMC Minutes

This week’s economic calendar includes several key data releases which are expected to add an extra level of volatility surrounding the US Dollar. Investors will look to Wednesday’s FOMC minutes report to provide fresh clues over various members’ thoughts on the current state of the US economy and the path of future rate hikes, just before the first reading of US Q2 GDP is reviewed on Thursday. Also set for release on Thursday is the Fed’s preferred inflation reading, the Personal Consumption Expenditure Price index (PCE) print will highlight areas is growing pressures across the US economy. All of these events and releases are likely to add extra volatility against majors throughout this week.

Will Lagarde reinforce ECB policy path?

Like the UK, it is a slightly quieter week for economic data. Economic activity data in the form of the German IFO survey (Monday) and the PMI manufacturing and service sector data is set for release on Tuesday and will both provide indications of May economic trends. The German IFO survey has been somewhat less optimistic, signalling a sharp recent fall in confidence and it may fall modestly further this month, however economic activity in the manufacturing and service sectors is expected to remain positive. Given the recent change in tone from ECB members with regards to the direction of interest rates, ECB President Lagarde rhetoric will be closely monitored for clues on policy as she speaks on Tuesday and Wednesday.

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