Softer inflation data further takes shine off EUR in the near-term
USD: Fed pushes back against building expectations for June hike
The US dollar has continued to trade at modestly weaker levels during the Asian trading session after the recent bullish trend suffered a setback yesterday. After hitting an intra-day high yesterday at 104.70, the dollar index has since fallen back to towards 104.20. The main trigger for the US dollar sell-off were dovish comments from Fed Governor Jefferson who pushed back against building market expectations for another 25bps rate hike at their next policy meeting on 14th June. He stated that the Fed has “slowed” the pace of hikes as the policy rate has approached a sufficiently restrictive rate. “A decision to hold our policy rate constant at a coming meeting should not be interpreted to mean that we have reached the peak for this cycle. Indeed, skipping a rate hike at a coming meeting would allow the Committee to see more data before making decisions about the extent of additional policy firming”. The comments provide a strong signal that the Fed leadership favours keeping rates on hold in June to allow more time to assess incoming data, but will keep alive expectations for another hike at the following policy meeting in July. A view that has been heard by the US rate market which has been moved to scale back June rate expectations (9bps are currently priced in) but is still pricing in high probability of a July rate hike (21bps are currently priced in). While a June hike can’t be completed ruled out, the Fed appears to have set a high bar and it would likely require a significant upside surprise from Friday’s non-farm payrolls report to prompt the Fed to take more immediate action to further address upside inflation risks. The Fed has not been unduly worried by the release recently of the stronger than expected PCE deflator report for April and yesterday’s JOLT job opening report for April that revealed a pick-up in demand for labour although it did follow a sharp fall in the first three months of this year. Overall, the comments will help to put a dampener on the US dollar’s recent upward momentum but are unlikely to trigger a deeper reversal lower while incoming US economic data is keeping alive expectations for another hike in July, and at the same time the softening outlook for growth outside of the US is providing more support for the US dollar.
DISINFLATION TAKING HOLD IN THE EURO-ZONE
Source: Bloomberg, Macrobond & MUFG GMR
EUR: Inflation pressures easing more quickly than expected in euro-zone
The euro remained under selling pressure yesterday until the dovish comments from Fed Governor Jefferson that had seen EUR/USD hit a fresh intra-day low of 1.0635 as it moved further below last month’s high of 1.1091. The euro has also weakened further against the pound resulting in EUR/GBP falling back below the 0.8600-level for the first-time mid-December. The euro sell-off was reinforced yesterday both by evidence of a sharper than expected slowdown in euro-zone inflation pressures, and by further evidence of slowing growth momentum in China at the start of Q2. The release of the latest CPI reports from Spain, France and Germany have increased the likelihood that today’s euro-zone CPI report will come in much weaker than previously expected. The country by country data revealed more reassuring evidence that food inflation is starting to slow more alongside the sharp reversal that has already taken in place in energy inflation. Food prices have had a more destructive impact on demand in France where the latest household spending report revealed that real spending on food products has fallen sharply by -12.6% since the end of 2021.
At the same time, the latest CPI reports revealed evidence that core inflation pressures have eased more than expected. Core inflation in Spain slowed by 0.5 percentage point to 6.1%, and Bloomberg has estimated that the Germany core inflation rate likely dropped by a similar amount as well. It poses downside risks to the consensus forecast for the euro-zone core rate to fall by just 0.1 percentage point. If confirmed in today’s euro-zone CPI report, the faster pullback in inflation pressures will be welcome news for the ECB although do not alter our expectation for the ECB to deliver another 25bps rate hike this month on 15th June, and then we still expect one final hike in July to bring the deposit rate to a peak at 3.75%. A view that is well priced into the euro-zone rate market that has become more reluctant to price in rates continuing to rise closer to 4.00% and beyond after the recent run of softer activity and inflation data.
KEY RELEASES AND EVENTS
|
Country |
BST |
Indicator/Event |
Period |
Consensus |
Previous |
Mkt Moving |
|
EC |
09:00 |
Manufacturing PMI |
May |
44.6 |
45.8 |
!! |
|
UK |
09:30 |
Manufacturing PMI |
May |
46.9 |
47.8 |
!!! |
|
EC |
10:00 |
HICP ex Energy & Food (YoY) |
May |
7.2% |
7.3% |
! |
|
EC |
10:30 |
ECB President Lagarde Speaks |
-- |
-- |
-- |
!!! |
|
US |
12:30 |
Challenger Job Cuts (YoY) |
-- |
227.2% |
175.9% |
! |
|
EC |
12:30 |
ECB Account of Monetary Policy Meeting |
-- |
-- |
-- |
!!! |
|
US |
13:15 |
ADP Nonfarm Employment Change |
May |
170K |
296K |
!!! |
|
US |
13:30 |
Unit Labor Costs (QoQ) |
Q1 |
6.3% |
3.2% |
!! |
|
US |
15:00 |
ISM Manufacturing PMI |
May |
47.0 |
47.1 |
!!! |
Source: Bloomberg
