Dollar Puts The Brakes On The Trend

GBP finds upward surge capped by USD and EUR

GBP

After a powerful upward move by the Pound during the week, reaching a peak of just over $1.2700 (the highest the pair has touched since the 10th April this year) Sterling has now crept downwards for the second consecutive day.

With nothing of note on the docket today for UK economics, it must now play a reactive role against addresses from several Federal Reserve members and inflationary updates from the ECB.

Any monetary policy alignment or divergence, as always, the key driver of moves and the fulcrum on which traders now monitor inflows and outflows to currencies.

No Major Data

EU inflation data could provide directional clues

EUR

Major inflation data is due today from the EU, being the Harmonised Index of Consumer Prices. The broad consensus being that these experience little change in their various data iterations but, if changes are registered, may be formative in the opinions of investors.

Recent statements from European Central Bank (ECB) policymakers suggest an increased likelihood of the bank starting its easing process in June, although there is still uncertainty about the ECB's decisions after the summer.

Board member Hernandez de Cos noted on Thursday that recent indicators pointing to a more controlled price evolution mean the bank is ready to initiate rate cuts in June. His colleague, Mario Centeno, observed that inflation in the bloc is consistently falling towards 2%, signaling that ECB interest rates are set to decrease, although he did not specify whether this would happen at the June meeting.

Member Martin Kazaks commented that while a June rate cut is probable, the institution is not pressured to hasten policy easing, implying that subsequent measures may be spaced out for thorough evaluation.

Looking ahead, the relatively subdued economic fundamentals in the Eurozone, along with the robustness of the US economy, reinforce the narrative of diverging policies between the Fed and the ECB, suggesting a stronger Dollar in the long term, particularly given the increasing likelihood of the ECB cutting rates before the Fed.

Major data: Harmonised Index of Consumer Prices (and Core Harmonised Index of Consumer Prices)

After a stumble in the week, the Dollar finds footing

USD

This week, Wednesday saw the the US produce inflation data in the form of both the CPI and core CPI figures, proving once again to be a stubborn resistor to the efforts of the Federal Reserve as both saw year-on-year increases. While both of these figures aligned with analyst forecasts, they nevertheless will prompt investors to view interest rate cuts as less urgent. Immediately following the news, treasury bond yields moved lower and the Dollar was sold off.

Yesterday, we then received several Federal reserve addresses that spoke to monetary policy and the thoughts of those at the wheel.

Federal Reserve Chairman Jerome Powell has indicated an expectation for a continued decline in US inflation throughout 2024. Additionally, he implied that additional interest rate increases by the Fed appear improbable.

The result of all this was a US Dollar firmly on the back foot during the early part of the week, pushing back both against the Pound and against a basket of currencies when measured in the Dollar Index. Finding it's feet though after the Fedspeak around policy timing targets and once again rejecting a move above $1.2700.

Major data: Addresses from Federal Reserve's Waller, Daly and Kashkari