A Lid on the Quid?
The dollar continued to lose ground for most of last week against its peers as traders convinced themselves that the end of the Fed’s tightening cycle was nearer than ever. The dollar index lost almost 1% before Friday during its fifth straight week of losses, its longest losing streak since July 2020. Last week’s catalyst for the dollar slide was the US inflation data, which contained no nasty surprises when released on Wednesday. The input side of the equation, the producer prices index, also showed an easing of upward pressure. With inflation slipping and Thursday’s unemployment showing the first signs of weakness, dollar bears needed little encouragement to push the greenback lower. Out of the blue, this trend suddenly reversed on Friday afternoon after Fed committee member Christopher Waller came out fighting and repeated fears that inflation wasn’t beaten and that their policy is still higher for longer. Waller’s comments that rates would need to stay high seemed to spook the markets. His speech was in contrast to his colleague Raphael Bostic’s dovish views earlier in the day that the Fed will hike in May and then pause, or in his words, they will” hit the mark and hold”. The dollar rally was helped by the Michigan consumer sentiment survey, which surprised on the upside and strong Bank earnings, which, when combined with hawkish Fedspeak, was enough to turn the markets. With Oil sitting above $82, have inflationary pressures gone from the US, and will the Fed start to look to ease policy towards the end of the year? We’re not so sure.
The primary beneficiary of the dollar’s recent softening has been the euro which was sitting comfortably above the $1.10 level until Friday’s late reversal. The single currency is benefitting from the unusually clear messages from the ECB that they will move rates at their next meeting. Whether the council decides to move by 25bp or 50bp is still up for debate, we in common with the market just favour 50bp followed by a further move over the summer months, but the markets sense policy divergence from the Fed, which will be enough to underpin the single currency for the foreseeable future. Sterling has gained over five cents against the buck in the last two months and touched its highest level for ten months at $1.2545 before reversing. However, the pound has failed to match the euro’s strength and has consequently tended to languish around the €1.13. The pound’s problem against the single currency is mainly that there is no clarity from the Bank of England on how they see the future course of interest rates in the UK.
The data docket is not exactly bursting in the US this week, with regional manufacturing and housing data being the highlights, if you can call them that. More probably, the words of wisdom falling from the mouths of the various Fed officials lined up to speak before their quiet period starts ahead of the next FOMC will be the headline grabbers along with the weekly employment update on Thursday. Similarly, over the channel, the eurozone hasn’t got any top-line data releases this week. The main focus is Purchasing Managers Indexes, which should lend more impetus to the 50bp rise camp. The Bank of England will get a feel for how the UK’s economy is faring over the next few days with a veritable cornucopia of data scheduled. The run starts tomorrow with March’s unemployment and earnings data. Did Huw Pill, Bank of England Chief Economist, give us a hint on good numbers on wage increases last week when he said that he was seeing a “clear sign of some turning in wage momentum.” It was certainly an interesting observation whilst Junior Doctors ask for a 35% pay rise and other public sector wage disputes roll on! Undeniably pay rises generally have dropped from their peak of nigh on 8% at the back end of last year to something nearer 4% now. Huw Pill also noted last week that whether this level is compatible with getting inflation back under control is open to question. The all-important inflation data, scheduled for Wednesday, should show the headline number dipping into single figures. After recent comments from BoE policymakers, “inflation persistence” will determine whether interest rates continue to rise, so watch for signs of that. The week closes out with Retail Sales on Friday expected to slightly underwhelming. By the weekend, we should have a clue as to whether the Old Lady will feel the need to hike rates by a further 25bp next month, which we still feel they will try and avoid at all costs; consequently, a lid should stay on the quid this over the coming trading sessions.