Investors Seek Shelter Under The US Dollar

Hello and welcome back. Last week, the dollar had a remarkable week as the Dollar Index appreciated from 104 to 106. The buoyant labour market data at the start of the month set the dollar off in the right direction and this was further compounded when March’s inflation report was released on Wednesday. Expectations for a June rate cut have collapsed with markets expecting “higher rates for longer”. The chances of a September cut stand at less than 50% and brings into the question whether the Fed will cut this year at all! This is a far cry from the six cuts that were expected in December.?

Escalating geopolitical tensions have dominated the headlines this weekend following the first-ever direct Iranian attack on Israel. While Israeli defence systems averted serious damage it is certainly an escalation and there is increasing risk that allies such as the US will be drawn into the conflict. During Asian trade this resulted in lower yields, lower equities and a firmer US dollar. This has dissipated throughout the European sessions as markets have focused on calming words from Biden’s administration who’s “…aim is to de-escalate regional tensions.”?

In the absence of US fundamental data this week, we expect volatility to remain elevated and the dollar to remain bid as investors seek the safe-haven greenback.?

In the EU, the June ECB meeting is widely telegraphed as the meeting that we will see Lagarde and co cut interest rates by 25bps. The only way we see this being derailed is in the event of a big surprise to the upside in wage growth. This is due for release in May and is earmarked as the final piece to the inflation puzzle before the ECB are ready to act. However, we did hear from ECB member, Simkus, today who suggested that “…geopolitical shocks such as an escalation in the Israel and Iran conflict could cancel the June rate cut.” It’s an outside chance, but it is definitely worthwhile bearing in mind.?

For the week ahead the EU releases industrial production data and the ZEW investor confidence data. There are also a number of ECB speakers this week, including President Christine Lagarde, who will be speaking in Washington on Wednesday.?

Sterling’s important week kicks off tomorrow, and the Wage Inflation figures will be released first thing. We are anticipating a slight decline in average earnings, 5.5% versus 5.6% previously, which would represent the lowest rate of increase since July 2022. The unemployment rate is expected to creep higher to 4% from 3.9%.?

March’s CPI inflation report is released on Wednesday morning and is also seen as gradually decelerating. However, as we’ve seen in the US, it is not all plain sailing! We are expecting a 0.2% decrease in the year-on-year (YoY) number and an even bigger drop is expected in the Services component of the CPI report. Services CPI is expected to decline to 5.7% YoY from 6.1% previously. Should this report continue to show disinflation we’d expect June’s probability of a rate cut to edge back above 50% (currently 33%). Sterling may find itself under pressure in this event. The final release of note for the UK are Retail Sales on Friday where we are anticipating a rebound from UK retailers.?

There’s plenty to talk about this week – that is for sure!?

Current Rates & Technical Levels

?Economic Events?

What are we reading?

Check out some of the articles the team has been reading this week.

• Iran warns it will strike again with greater force if Israel or US retaliate (read now)
• UK Is Beating US on Inflation Fight And May Cut Rates Sooner (read now)
• Europe's economic divergence with US is real but has its limits (read now)
• US inflation jumps as fuel and housing costs rise (read now)

Thank you for reading! We'll be back next week with another edition. This edition of Birchstone's Weekly View was written by Portfolio Manager Shaun Garrett