Spectrum FX Daily Report

Most currencies have found a temporary floor against the US dollar in the past few trading sessions, although the greenback has remained firmly on top and around its strongest position since November. Investors are doubling-down on bets that the Federal Reserve would delay the start to US rate cuts following a string of impressive economic figures and some hawkish communications from FOMC members. Fed chair Powell said earlier in the week that the recent stronger-than-anticipated CPI data would likely lead to a delay to the start to US rate cuts. This sentiment was echoed by fellow policymakers on Thursday, including New York. Fed President John Williams, who warned that there was no urgency to lower rates. This means that markets are now not only discarding the June meeting as a possible start date to cuts, but futures are not fully pricing in the start to easing until the bank’s November meeting.

While this has provided clear support for the greenback (the dollar is trading almost 2% higher in the past ten days), we have seen a modest pullback in the dollar index since its highs on Wednesday. This includes a modest rebound in GBP/USD, which has received a bit of a leg up from this week’s UK inflation report. UK inflation eased in March, dropping to a fresh two-and-a-half year low 3.2% from 3.4%, while the core measure also dropped to 4.2% from 4.5%, its lowest level since December 2021. The path towards the 2% inflation target is, however, not progressing at quite the pace that the Bank of England would wish to see, with both of the above indicators coming in above estimates (3.1% and 4.1% respectively).

The continued stickiness in services inflation, in particular, will be a cause for concern for ratesetters, and may elicit a cautious approach among MPC members at upcoming meetings. Swap markets still see a realistic possibility of looser policy in the summer, although Wednesday’s data has somewhat put a spanner in the works. The upcoming inflation report for April will be highly important in determining the timing of the first UK rate cut, with plenty of disinflation on the way once the household energy price cap is lowered. We would, however, likely need to see a rather sharp downside surprise in next month’s data to pave the way for a first UK rate cut in June, which is now roughly 30% priced in by swap markets.

ECB’s Lagarde paves the way for June interest rate cut Revised Euro Area inflation figures, also on Wednesday, provided little in the way of fireworks, with the data printing in line with the initial estimates. The lack of an upside surprise, and the dovish tone of communications from European Central Bank President Christine Lagarde, appear to have all but cemented the case for a June interest rate cut in the bloc. Lagarde noted that the disinflationary process was moving according to the bank’s expectations, and that subject to additional shocks it would be time to moderate the restrictive monetary policy in reasonably short order.

Such comments would ordinarily be the precursor to a further euro sell-off, although with a June rate cut almost fully priced in for some weeks now, the common currency has managed to find some respite around the 1.065 level on the dollar. There will be no major data out of the Euro Area on Friday, although investors will already have one eye on Tuesday’s business activity PMIs for April - the leading indicator of economic activity in the bloc. We will be looking for further signs of a rebound in the services sector, in particular, which could provide euro bulls with at least some reason to cheer.

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