Dollar Edges Lower as Fed Rates Likely to Stay Higher for Longer
GBP
GBP/USD is currently trading at 1.2533 (interbank). GBP/EUR is trading at 1.1700 (interbank).
Yesterday, the UK manufacturing sector experienced a setback in April, with both output and new orders contracting.
The seasonally adjusted S&P Global UK Manufacturing Purchasing Managers’ Index (PMI) for April was 49.1, down from March’s 20-month high of 50.3, although it surpassed the earlier flash estimate of 48.7. Weak demand, cost control measures, supply chain disruptions, and a preference for reduced stock holdings influenced purchasing activity and inventory levels in April.
Investors anticipate a potential interest rate cut by the BoE in either their June or August meeting, supported by BoE Governor Andrew Bailey's confidence in headline inflation returning to 2% in April.
Data from the UK has been sparse as investors gear up for next week’s interest rate decision and press conference. Final Composite and Services PMI readings are scheduled for tomorrow.
No significant events are scheduled for today
EUR
EUR/USD is currently trading lower at the interbank level of 1.0713.
Yesterday, the Eurozone economy demonstrated growth of 0.3% in the first quarter of 2024, surpassing expectations and marking the strongest growth since Q3 2022. Annual inflation remained stable at 2.4%, while core inflation slowed to 2.7%, potentially paving the way for the first ECB rate cut in June.
Additionally, the seasonally adjusted GDP of the euro area and the European Union for January-March 2024 increased by 0.3% quarter-on-quarter. In contrast, the eurozone economy contracted by 0.1% q/q in the fourth quarter of 2023, while the EU remained stable.
Caution may be warranted if monthly headline and core inflation rates persist at these levels in May and beyond, potentially hindering the ECB’s rate-cutting cycle.
Today will see further final PMI data from the Eurozone, along with a speech by ECB member Lane later in the day.
Today’s Events (GMT):
08:55 - HCOB Germany Manufacturing PMI (Apr) - Forecast: 42.2
09:00 - HCOB Eurozone Manufacturing PMI (Apr) - Forecast: 45.6
21:15 - ECB's Lane Speaks
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USD
The dollar index, which gauges the currency against a basket of other major currencies, is currently trading at 105.75.
As widely expected, the U.S. central bank maintained its benchmark rate in a target range of 5.25%–5.50% at its May meeting on Wednesday, marking its highest level in over two decades. The US Fed did not foresee a need to cut the interest rate until it gains greater confidence that inflation is sustainably moving towards its 2% target.
Moreover, Federal Reserve Chairman Jerome Powell noted that progress on inflation has recently stalled, indicating that more time may be required than previously anticipated to bring inflation down to the central bank’s 2% target. Powell also suggested that if robust hiring persists and inflation remains stagnant, it would justify delaying rate cuts.
Today, the markets are awaiting weekly Initial Jobless Claims, Nonfarm Productivity, and Factory Orders.
Today’s Events (GMT):
13:30 - Initial Jobless Claims - Forecast: 212K
CAD
USD/CAD is currently trading at 1.3715 (interbank) in today’s trading session.
Crude oil prices have edged higher this morning with Brent crude rising by 0.6% to $83.92 a barrel. U.S. West Texas Intermediate (WTI) crude also climbed 0.6% to $79.46 a barrel.
Traders are increasingly speculating that the BoC might reduce interest rates in June as Canada's economy weakened in the first quarter of this year. Canada’s GDP grew at a slower pace of 0.2% MoM in February, compared to the previous reading of 0.5%, falling short of the market expectation of a 0.3% expansion.
Furthermore, the Canadian Manufacturing PM dropped to 49.4 in April and 49.8 in March, below the market consensus of 50.2, according to S&P Global on Wednesday.
Late Wednesday, BoC Governor Tiff Macklem reiterated the Bank's confidence that inflation will continue to decline, and stated that the BoC is edging closer to rate cuts. Macklem added that the BoC isn't bound to follow the Federal Reserve's playbook, as higher rates in Canada are proving to have ‘more traction’ than in the U.S.
Today’s Events (GMT):
13:45 - BoC Senior Deputy Governor Rogers Speaks
13:45 - BoC Gov Macklem Speaks
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