MARKET REVIEW 20/05/2024

DOLLAR SLIPS AFTER UNEXPECTED RISE IN US PRODUCER PRICES

The dollar eased on Tuesday after an unexpected increase in U.S. producer prices in April amid strong gains in the costs of goods and services, indicating inflation remained stubbornly high early in the second quarter. The report from the Labor Department also showed wholesale goods prices rising solidly last month, though the cost of food declined. Traders trimmed their expectations for the Federal Reserve to cut interest rates in September after the report. The dollar index , a measure of the U.S. currency against six major peers, slid 0.02% to 104.99, right in the middle of 103 to 107 in what Brad Bechtel, global head of FX at Jefferies in New York, called its range for the year. “It’s pressing kind of neutral, almost as if people have cleaned up their positioning and are kind of flat going into tomorrow,” he said, referring to the release on Wednesday of the consumer price index (CPI) for April. “In terms of things like carry trades, those are still very much well positioned,” Bechtel said. “Aussie-yen, Mexican-yen and even the dollar versus the yen to some extent, risk appetite is still there.” The Australian dollar-yen cross rate rose to the second-highest this year, outside of a more than 10-year high of 104.95 touched on April 29. It was last up 0.36% at 103.59. The euro rose 0.28% to 1.0820. The producer price index for final demand rose 0.5% in April after falling by a downwardly revised 0.1% in March, the Labor Department’s Bureau of Labor Statistics said.

STERLING HITS FRESH 2-WEEK HIGH VERSUS DOLLAR AHEAD OF US DATA

Sterling hit its highest level in almost two weeks versus a weakening dollar and was broadly unchanged against the euro on Wednesday ahead of key U.S. inflation data. The pound fell on Tuesday after Bank of England (BoE) chief economist Huw Pill said the central bank might be able to consider cutting interest rates over the summer. Meanwhile, British wages grew more than expected. Still, other figures suggested the labour market is losing some of its inflationary heat, keeping the BoE on alert about when to cut interest rates. Market bets on future BoE rate cuts remained roughly unchanged, discounting an around 50% chance of a first move in June while fully pricing in a 25 basis point (bps) rate cut in August and more than 50 bps by year-end. The dollar dipped to a one-month low versus the euro on Wednesday amid lower Treasury yields as traders braced for a key U.S. inflation report later in the day that could dictate the path of Federal Reserve policy. Sterling rose 0.18% to $1.2610 after hitting $1.2616, its highest level since May 3. “From here, some modest pound weakness is likely given the UK has more room to cut rates than the European Central Bank (ECB) does, and rate moves are by far the biggest driver of exchange rates at the moment,” said Kit Juckes, foreign exchange strategist at SGCIB Bank. “But in the longer run, rates that are about 150 bps higher than the euro zone’s won’t just cap the euro versus the pound, but help it break lower,” he added.

DOLLAR REBOUNDS ON HIGH US IMPORT PRICES

The dollar rose on Thursday after data showed U.S. import prices increased 0.9% last month, a jump that raised concerns the Federal Reserve’s fight to tame inflation is not yet done and could delay plans for policymakers to cut interest rates. Economic data this week offered the U.S. central bank good news, but policymakers haven’t openly shifted their views on the timing of rate cuts many investors believe will start this year. The jump in the price index for U.S. imports in April was the largest one-month increase since it rose 2.9% in March 2022, the Bureau of Labor Statistics said. Prices for U.S. imports last declined on a monthly basis in December, the BLS said. The market also was grappling with a drop in the number of Americans filing new claims for unemployment benefits last week that pointed to underlying strength in the U.S. labor market. A strong economy could keep rates higher for longer. “The market is, of course, very sensitive to signs of inflation from wherever it may come, and the import price series that we got today was meaningfully stronger than expected,” said Brain Daingerfield, head of G10 FX strategy at NatWest Markets in Stamford, Connecticut. “The Fed wants to see consistent progress in more than just one point. The number we got yesterday – the CPI – was not as bad as feared,” he said. “But I don’t think it was enough to materially change the market’s outlook for the Fed and that’s reflected in the way that the dollar has bounced back today.”

DOLLAR MOSTLY FLAT AS MARKET MULLS INFLATION OUTLOOK

The dollar retreated against major currencies on Friday as market speculation continues to swirl about the timing of Federal Reserve interest rate cuts amid signs of cooling yet persistent inflation and a softening U.S. economy. While consumer prices for April, reported on Wednesday, rose less than expected – leading to a risk-on flavor in equity markets – various Fed officials have sounded words of caution about when rates may fall, limiting the dollar’s decline this week. The dollar index , which tracks the U.S. currency against six peers, slid 0.04% to 104.44 after earlier trading about 0.3% higher. “The market has turned cautious on the prospect for rate cuts in the near term. The overall picture, though, does appear consistent with a fading of the U.S. exceptionalism trade,” said Karl Schamotta, chief market strategist at Corpay in Toronto. “We are seeing signs of slowing momentum in the U.S. economy,” Schamotta added. “All of that is translating into less upward pressure on the dollar at the same time you are seeing a brightening of prospects elsewhere.” The dollar index , which tracks the U.S. currency against six peers, slid 0.04% to 104.44 after earlier trading about 0.3% higher. “The market has turned cautious on the prospect for rate cuts in the near term. The overall picture, though, does appear consistent with a fading of the U.S. exceptionalism trade,” said Karl Schamotta, chief market strategist at Corpay in Toronto.

STERLING ON TRACK FOR WEEKLY GAIN AHEAD OF UK INFLATION DATA

Sterling was on track for a weekly gain versus the dollar on Friday, as currency traders look ahead to key data releases next week that could point to how quickly the Bank of England may cut interest rates. The pound edged down 0.1% on the day to $1.2656 , but was on track for a weekly gain of 1%. Against the euro, it gained 0.1% to 85.70 pence . Data this week showed that British wages grew by more than expected in the first three months of the year, but other figures suggested the labour market is losing some of its inflationary heat. Closely-watched consumer price inflation data is due out on Wednesday, while ‘flash’ PMI data on British business activity will follow the next day. Money markets are pricing in around a 55% chance of a rate cut in June, according to LSEG data. “Our baseline case is still a June rate cut. We do consider however that significant reductions in the pace of private pay and the rate of services inflation could be quite a stretch and that the Monetary Policy Committee (MPC) could delay a move to August,” economists at Investec said in a note. On Tuesday, Bank of England chief economist Huw Pill said the central bank might be able to consider cutting interest rates over the summer.