USD has proven more resilient this week

USD: More resilient price action as US debt ceiling comes into focus

The major foreign exchange rates have remained relatively stable overnight at the end of a week that has seen the US dollar trade on a firmer footing. The yen has been the only G10 currency that has strengthened marginally against the US dollar so far this week.  Most other G10 currencies have declined by around -0.8%-1.0% against the US dollar. It has resulted in the dollar index rising back up to the 102.00-level as it moves further above the intra-day low from 4^th May at 101.03. The next important resistance level comes in at 102.40 which is the intra-day high from 2^nd May which is the top of its recent tight trading range. In recent price action the US dollar has shown more resilience with it failing to weaken further following the release of the US CPI report on Wednesday that showed a much softer print for core services inflation excluding housing that has been flagged as important by the Fed, and just yesterday there a notable break higher for initial jobless that provides further evidence that the US labour market is continuing to weaken although it was partly driven by a seasonal adjustment issue according to reports. It has resulted in US yields correcting lower again but the US dollar has held up better than expected. The US rate market is more confident again that the Fed will not hike rates again, and will reverse course and deliver 75bps of cuts later this year.

The resilience of the US dollar over the past week could reflect in part more investor unease over the global growth outlook. It has been notable that the price of copper has broken lower back below its 200-day moving average for the first time since the start of this year. It follows recent weakness as well in the price of iron ore that is casting some doubt over the strength of the economic recovery in China especially in sectors that are more important for commodity demand such as the housing sector. The latest monthly activity data from China for April will be released next week on Tuesday and will be closely watched by market participants to assess the ongoing strength of the recovery and break down of growth. At the same time, the recent data flow from the euro-zone has started to disappoint expectations. The economic surprise index for the region has moved into negative territory for the first time since September of last year with the relief that the euro-zone avoided recession over the winter period and at the start of this year already well priced in now.

Furthermore, the US dollar could be deriving more support in the near-term from more unease amongst market participants over risks to financial stability and growth posed by the ongoing loss of confidence in US regional banks and looming US debt ceiling stand-off that could be helping to temporarily disrupt the weakening US dollar trend that has been in place driven by expectations of looser Fed policy. Bloomberg has reported overnight that President Biden and House Speaker McCarthy have postponed their meeting on the debt ceiling scheduled for today in order to aides more time to continue negotiations. The report claims that staff-level talks on energy permitting reform and government spending have yielded progress. The leaders now plan to meet again next week.  As we move close to the  US debt ceiling, price action in the FX market could become more choppy.         

USD CONSOLIDATING AT WEAKER LEVELS

Source: Bloomberg, Macrobond & MUFG GMR

GBP: Initial rally following BoE update proved short-lived

The choppy price action was evident yesterday for the pound when it initially strengthened following the BoE’s policy update but quickly gave up those gains and closed down lower on the day against both the US dollar and euro. Cable has fallen back towards the 1.2500-level and EUR/GBP risen back towards its 200-day moving average at around 0.8740. As we highlighted in yesterday’s FX Focus report (click here), we don’t believe the pound sell-off was just justified by the BoE’s policy update yesterday, and could have been driven more by more unfavourable external conditions highlighted above. At yesterday’s policy meeting, the BoE raised their policy rate in line with expectations by 25bps and left the door open to further rate hikes if they judge that the risk of persistent inflation increases further. A similar message to at previous MPC meetings.

The BoE’s updated forecasts showed large upward revisions to the growth outlook with the UK economy now expected to avoid recession but expand well below trend in the coming years. The updated inflation forecasts show inflation coming down more slowly in the year ahead reflecting in part more concern that food price inflation will prove stickier, and further out the updated inflation forecasts signal more upside risks although inflation is still expected to fall back to target. The policy update supports our outlook for at least one more 25bps hike from the BoE that would lift the policy rate closer to 5%. One could argue though that there is now a higher hurdle for inflation to surprise to the upside in the coming months. The updated modal forecast for CPI in Q2 has been set 8.2% which appears on the high side compared to consensus expectations of closer to 7% amongst UK economists. It could ease some of the near-term pressure on the BoE to hike further if inflation comes in lower.

KEY RELEASES AND EVENTS

Country	GMT	Indicator/Event	Period	Consensus	Previous	Mkt Moving
EC	09:00	ECB's De Guindos Speaks	--	--	--	!!
UK	12:15	BoE MPC Member Pill Speaks	--	--	--	!!
US	13:30	Export Price Index (MoM)	Apr	0.2%	-0.3%	!!
US	13:30	Import Price Index (MoM)	Apr	0.3%	-0.6%	!!
UK	14:00	NIESR Monthly GDP Tracker	--	0.0%	0.1%	!!
GE	14:00	German Current Account Balance n.s.a	Mar	--	22.6B	!
US	15:00	Michigan Consumer Sentiment	May	63.0	63.5	!!

Source: Bloomberg