Mixed FX momentum ahead of key US inflation data

USD: US data backs up July hike – but key data still to come

The US dollar advanced yesterday and has stabilised today with data from the US yesterday stronger than expected, which helped lift the 2yr UST note yield by a substantial 15bps – it was the biggest one-day move since the much stronger NFP report at the start of June. The revised Q1 GDP data came in stronger than expected with personal consumption fuelling the gain. We will see later today where that revision was focused on. Most of the Q1 consumer spending strength was in January but if revisions were to March data that would help lift expectations on Q2 consumer spending. Initial claims data likely also fuelled the dollar buying given the increased sensitivity to labour market data given this has been the most obvious source of continued economic strength.

Like we suggested in the FX Weekly (here) last Friday, the FX and rates markets will be increasingly dictated by incoming economic data as we approach the peak in tightening cycles. For the Fed, the PCE inflation data today will be one key piece of info. The consensus is for the core rate to remain unchanged at 4.7% YoY with the headline rate falling from 4.4% to 3.8%. The PCE core services excluding housing increased 0.42% MoM last month and by 4.64% YoY. The 3mth average annualised increase remains elevated at 4.92%, but down from 5.13% in March – this measure needs to continue decelerating to highlight a turn in momentum. Given most other measures of inflation are now falling in the US, the risk is increasing that we will start to see this underlying inflation measure start to fall as well.  

A stronger inflation print would certainly further increase pricing of a 25bp hike on 26^th July although with NFP next week, we would not expect a substantial shift in rate hike expectations. The market is currently priced at about an 85% probability of a 25bp hike – so there is limited further scope for yields from here in pricing fully a 25bp hike next month. The FX fallout will likely also be limited given the German inflation data yesterday saw the harmonised rate rebound from 6.3% YoY to 6.8%. The advance CPI print today from the euro-zone is likely to show core CPI accelerating.

The US dollar performance is likely to remain more mixed from here consistent with its performance through the first half of the year. The dollar has advanced versus five G10 currencies and weakened versus four. The pound remains the top performing although this reflects to some degree the poor performance in 2022. The worst performing currency this year remains the yen with the BoJ fast becoming the central bank with the loosest official policy rate in real terms – only the Riksbank is more negative and SEK is the third worst performing G10 currency. Near-term there are downside risks for EUR/USD but an active ECB and higher core inflation through the summer should provide support. EUR is the fourth best performing G10 currency year-to-date.

RECENT 3MTH MOMENTUM FOR US PCE INFLATION AT 5% ANNUALISED

Source: Bloomberg & Macrobond

AUD: China stimulus expectations fuels AUD buying

The Australian dollar performance yesterday really stood out – advancing 0.5% versus the US dollar and the only G10 currency to manage a gain with all other G10 currencies weakening versus the dollar. Much of the advance took place in London afternoon trading and some delayed reaction to earlier news on stimulus steps about to be announced in China appears to be a factor behind the move.  

It is modestly higher again today with the 2-year government bond yield up 10bps, slightly more than in New Zealand although AUD/NZD has corrected modestly lower today after the big jump yesterday when AUD had a much bigger reaction to the China stimulus speculation than NZD. AUD was also supported by stronger than expected retail sales data earlier yesterday.

But any China stimulus steps if notable would certainly help draw in fresh buying of AUD. AUD, CAD and NZD positioning combined highlights the appetite of investors to sell these global growth sensitive currencies, reflecting global growth concerns. Data released today in China continued to suggest that stimulus is required. The manufacturing PMI increased marginally from 48.8 to 49.0 while the services PMI fell from 54.5 to 53.2. State media yesterday reported that a cabinet meeting chaired by Premier Li Qiang had agreed to take action with a package of stimulus measures to support household consumption. Policies will be aimed more at the household sector with demand in that area likely to have a broader supportive impact on the economy. The details of the package are likely to be announced in July when Politburo policy meetings are scheduled. With China data continuing to disappoint there is an increased urgency to try and arrest the weakness and lift confidence. The household sector is likely to be the area where policy support can have a greater impact. The CSI 300 is around 0.7% higher today.

GLOBAL GROWTH CONCERNS HAS ENCOURAGED SHORTS IN AUD, NZD & CAD

Source: Macrobond

KEY RELEASES AND EVENTS

Country	BST	Indicator/Event	Period	Consensus	Previous	Mkt Moving
GE	08:55	Unemployment change	Jun	14.0k	9.0k	!!
GE	09:00	Unemployment Rate	Jun	5.6%	5.6%	!
EC	10:00	CPI Estimate YoY	Jun P	5.6%	6.1%	!!!!
EC	10:00	CPI MoM	Jun P	0.3%	0.0%	!!!!
EC	10:00	Core CPI YoY	Jun P	5.5%	5.3%	!!!!
CA	13:30	GDP MoM	Apr	0.2%	0.0%	!!
CA	13:30	GDP YoY	Apr	1.9%	1.7%	!!
US	13:30	Personal Spending	May	0.2%	0.8%	!!
US	13:30	Real Personal Spending	May	0.1%	0.5%	!!!
US	13:30	PCE Deflator MoM	May	0.1%	0.4%	!!!!
US	13:30	PCE Deflator YoY	May	3.8%	4.4%	!!!!
US	13:30	Core PCE Deflator MoM	May	0.3%	0.4%	!!!!
US	13:30	Core PCE Deflator YoY	May	4.7%	4.7%	!!!!
US	15:00	University of Michigan Sentiment	Jun F	63.9	63.9	!!
US	15:00	U. of Mich 1-Year Inflation	Jun F	3.3%	3.3%	!!
US	15:00	U. of Mich 5-Year Inflation	Jun F	3.0%	3.0%	!!
CA	15:00	BoC Overall Business Outlook Survey	Q2		-1.1	!!

Source: Bloomberg