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1. The US dollar fell below a key level of 102 in April, reaching a low not seen since 2 February this year. Prices have spent most of the month ranging between 102 and 101, as economic data indicates patchy growth in different parts of the economy. Manufacturing continues to lag the services sector and Inflation remains persistent. A proxy for wage growth, the employment cost index, came in higher than forecasted in the first quarter of this year, creeping up from the last quarter of 2022. Advance GDP growth weakened below expectations this quarter while remaining positive, pointing to weakness in the US economy. Against the backdrop of First Republic Bank’s takeover by JP Morgan, markets are expecting a 25bps hike by the Fed this week, as the Fed nears its peak rate. However, it remains unclear how the Fed will act beyond this week’s rate hike meeting, given that inflation could remain stubborn. The continued hiking by the Fed’s peers could see continued weakness in the dollar.
2. The euro rallied above $1.09 against the dollar, touching highs of $1.10 last seen in April 2022. The ECB has kept markets guessing about the size of May’s rate hike, either 25bps or 50bps, possibly due to the deep differences between the members of the ECB. Markets are leaning towards a 25bps hike. Some ECB members have mentioned that talk of a pause is premature, while others have called for caution as credit tightens for businesses and the effects of monetary policy wind their way through the financial system. ECB officials agree on one thing: that future rate decisions should remain data-dependent. The last week of April saw Germany and Spain post preliminary inflation data, with both coming in lower than expected, setting up an interesting situation for the eurozone’s CPI data due this week. Markets are expecting headline inflation to rise while core inflation falls, following which the ECB will release its rate decision on Thursday. The euro is likely to remain supported against the dollar, with the ECB’s late start on rate hikes giving it more room for further hikes when most of its peers are almost or already done tightening.
3. The pound sterling rose above $1.24 against the dollar, retracing to highs last reached in June 2022. While the BoE has continued raising rates, it has also sold a sizable portion of its corporate bond portfolio, with a view to selling them completely by April 2024. BoE officials have revised their estimates, now expecting the UK economy to narrowly avoid a technical recession later this year. Markets are pricing in one final rate hike this month, after inflation surprised investors by remaining in the double-digits. Wage growth came in higher than expected, while retail sales rose compared to the last quarter. Disagreements are also brewing between the dovish and hawkish members of the BoE, with one of them using Milton Friedman’s ‘fool in the shower’ to describe the more hawkish members. Still, given that the hawks outnumber the doves on the BoE, the pound is likely to remain strong.
4. The commodity currencies remained mostly flat in April, except for the Kiwi dollar which weakened slightly. NZD/USD fell below $0.62, despite the RBNZ’s jumbo 50bps rate hike in early April, as investors weighed the state of the New Zealand economy. Inflation slowed in the first quarter of this year, coming in below expectations and disappointing markets that were anticipating a rise. The negative trade balance also added to the Kiwi’s weakness. In Canada, GDP growth surprised market watchers to barely avoid a stall, falling m/m. USD/CAD recovered from lows of $1.33 to reach $1.35, as m/m CPI sank below expectations and core retail sales data turned negative. Elsewhere, the Aussie dollar continued ranging between $0.67 and $0.65, as employment data was more robust than expected, but q/q CPI fell from the previous quarter. The RBA also surprised markets to hike rates by 25bps in early May, likely done to reduce inflation back down to target while the economy still shows signs of strength.
5. Brent crude gave up all its gains from OPEC+’s surprise output cuts at the beginning of April, after Russian oil exports rebounded, and demand for gasoline and diesel remained lacklustre despite markets predicting demand to pick up from the Chinese economy. Margins at oil refineries fell as well, pointing to weakness in the demand for oil. Gold consolidated above $1970 per ounce, paring gains from a year-high of $2048 after markets took in data that pointed to persistent inflation. With markets awaiting the rate hike decisions of the Fed, ECB, and BoE, the price of gold is likely to continue moving sideways.
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