Daily Brief

The Dollar marches on

Back to Green for the dollar

This week has started off in much the same vein as we finished last, with the dollar marking notable gains across the board. Having listened on multiple occasions to the plethora of Fed officials waxing lyrical about the prospects for aggressive U.S rate hikes, and that notion being further endorsed by strong U.S data, markets have fully convinced themselves that the Fed will now act swiftly. As we said yesterday, that ‘swiftly’ represents a probable 50bps rate hike at each meeting for the next three FOMC meetings, according to the latest Fed Funds Futures pricing.

 

Caution is key for dollar bulls

Whilst the data and Fed may be supportive of such moves at the moment, a degree of caution is definitely required as the Fed embark on their likely journey. Those prospective hikes will remain entirely data-dependent, and estimations for U.S economic activity are already at a very high threshold. So, whilst the dollar has been understandably boosted by all of this, the chances of further gains for the greenback will be dependent on whether that data delivers going forward.

 

So far, so good

The dollar index (DXY) continues to probe to levels not seen since the early days of COVID, in Q1 2020. Having broken clearly above 100.00, yesterday marked a new cycle top for the DXY at 101.76. Most of the major currencies faltered against the greenback to some degree. However, USD/JPY was one notable exception, slipping back to 127.50. The slight pullback in US Treasury Bond yields may have helped to drive the correction here.

 

Cable crumpled, suddenly

The sudden weakness of the pound accelerated though yesterday. We touched on the main drivers in our update yesterday, but dismal UK data and worries over the potential for even more dismal data, have combined with geopolitical worries to ensure that market expectations for future BoE rate hikes have taken a serious knock over the past week. GBP/USD subsequently slipped below 1.2730 yesterday, having been as high as 1.3000 on Friday. We have not been down at these levels since September 2020. GBP/EUR fared slightly better and found some interim support at 1.1850, having been driven lower through Friday after giving up that significant 1.2000 region yet again. EUR/USD replicated the move in cable, and slipped back to 1.0700, having pierced 1.0850 on Monday morning in the immediate aftermath of the French presidential election result. The  intensity at which currency pairs are now moving around, now that markets have some serious interest rate differentials to consider is becoming ever more significant.

 

50bps for Canada in June?

During his latest speech yesterday, BoC governor Tiff Macklem, refused to rule out any chance that the BoC might raise Canadian interest rates by more than 50bps at any future meeting, but he did suggest that such a move would be ‘unusual’. Furthermore, he said that he expects the BoC to consider a further 50bps hike at their June meeting. Much the same as the U.S, and as you might expect, that move would be reflective of forthcoming economic performance in Canada. USD/CAD shrugged off the comments, and rallied back through 1.2750. The pair has rallied the best part of 300 pips over the past four trading days.

 

What else is happening today?

The latest U.S Durable Goods orders (Mar), Consumer Confidence (Apr) and New Home Sales (Mar) are all set for release later today. Of the three, Durable Goods probably carry the most significance to markets historically. The BoC’s Lane is set to speak later too. Australian CPI (QoQ/Q1) is out in the wee small hours overnight. An expected jump from 1.3% to around 1.7% is on the cards, as markets gear-up fora probable June rate rise in Australia.

 

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