Spectrum FX Daily Market Update

Euro recovers off lows as ECB set for ‘active summer’

Currencies traded within relatively narrow ranges on Monday, as investors patiently awaited a slew of macroeconomic data releases and central bank member speeches later in the week.

Most of the major currency crosses ended London trading more-or-less where they began them yesterday, with the limited news that we did get mostly taken in stride by FX market participants. Perhaps the most significant headline on Monday was news of further surprises to the downside in economic data out of China. According to figures released during Asian trading, Chinese retail sales sank by more than 11% year-on-year in April, a much sharper decline than the 6% contraction priced in. Industrial production also unexpectedly fell in Asia’s largest economy last month, down by 2.9% YoY (+0.7% consensus). Lockdowns in some of China’s major cities continue to drag on, notably in Shanghai, where the tough restrictions entered into a seventh week. News that reopening will commence on 1st June has, however, allayed concerns over a prolonged economic slowdown, and the yuan was able to hold its own versus the US dollar during the London session.

Amid tentative signs of an easing in restrictions in parts of China, the rally in the safe-havens has taken a breather. The US dollar has retreated, albeit only modestly, from its strongest position in two decades. EUR/USD appears to have found at least a temporary floor around the 1.04 mark, with the pair helped on its way yesterday by some hawkish comments from ECB member Francois Villeroy de Galhau. Villeroy claimed that a weaker euro could harm the Governing Council’s efforts to bring down rising Euro Area inflation, while also noting that the bank could by in for an ‘active summer’ on the monetary policy front. This more-or-less confirms our suspicion that the June ECB meeting will be a highly important one, and could pave the way for a first interest rate hike by no later than July.

As mentioned in our weekly FX market update, today’s US retail sales print could take on added importance for markets, given attention is now firmly on the impact of rising consumer prices on domestic demand - another solid print is expected in the headline number (+0.7%). Meanwhile, this morning’s UK labour data could trigger a few gyrations in sterling. We will be paying unusually close attention to the monthly claimant count number for any signs that heightened UK growth concerns are potentially weighing on hiring decisions. Markets will then quickly turn their attention to Wednesday’s UK inflation data, which is expected to show that prices soared by more than 9% in the year to April. If confirmed, this would place huge pressure on the Bank of England to continue raising interest rates at upcoming meetings. Communications from the MPC have turned increasingly dovish and largely muddled in recent weeks, although we think that upcoming inflation prints will likely force the bank’s hand. This week's line up of no fewer than six BoE member speakers provides a chance for a hawkish pivot, though it may be slightly too early.

For a live rate or to book a trade please contact us.

T: +44 203 440 7550 | E: [email protected] | W: www.spectrumfx.co.uk