Spectrum FX Daily Report

The dollar has extended its gains on most currencies globally this week, as investors brace for a hawkish set of communications from today’s FOMC announcement. There will be no change in policy from the Federal Reserve this evening, with Chair Powell looking set to pour cold water over the possibility of US rate cuts until at least the autumn. While we’re seeing a mild cooling in US economic activity, indicators of inflation have exhibited signs of stickiness and the May nonfarm payrolls report suggested that the labour market remains in a good place. Powell will likely reaffirm the Fed’s easing bias, but he will also probably indicate that officials are in no rush to cut.

We would expect the dollar to largely take its cue from the updated ‘dot plot’, which shows where FOMC officials see rates in the next few years. At the March FOMC meeting, the 2024 median rate projection was somewhat unexpectedly left unchanged at 4.6%, indicating three 25 basis point cuts this year. This is almost certain to undergo an upward revision, and we think that the median dot will be consistent with just two cuts in 2024 (from three) and three in 2025 (unchanged). There is a clear possibility, however, that this shows just one cut this year, which would be a clear bullish signal for the US dollar.

A big uncertainty for markets in the build up to today’s Fed meeting is that the May US inflation report won’t be released until later today (13:30 BST, 14:30 CET), a matter of a few hours before Chair Powell’s press conference. Even a modest upside surprise here could cement expectations for a hawkish Fed, and may trigger some USD upside this afternoon.

Euro struggles as European elections adds risk premium EUR/USD has extended its losses so far this week, ending London trading on Tuesday just above the 1.07 level, having opened on Friday around the 1.09 mark. While most of this move can be attributed to the strength of the US payrolls report, clearly the results of the weekend’s European Parliament elections are not helping either. As expected, we saw a clear shift to the political right, with the far-right populist parties, which tend to be EU sceptical, anti-immigration and pro-Russia, making notably strong gains in Germany and France. News of snap elections in the latter (first round on 30/06 & 07/07) has added an additional risk premium to the euro, while triggering a sell-off in European stock markets. We don’t see this as a long-term risk to the common currency, though clearly investors are not enjoying the near-term uncertainty.

Sterling dips after mixed jobs report, UK GDP data eyed GBP was a touch weaker on Tuesday morning after the latest UK jobs report had mixed implications for markets. Wage growth remained sticky and far too high for comfort in April at around 6%, well above the levels that would make the Bank of England have any real confidence in achieving its 2% inflation target.

The rest of the data was, however, patently consistent with a cooling in labour market conditions. Unemployment is rising, albeit gradually, and is now at its highest level since September 2021. The number of new claims for jobless benefits, as represented by the claimant count number, also surged higher in May, rising by the most since the COVID-19 restrictions were in place in February 2021.

Sterling largely held its own off the back of the data, as while rapidly rising wages could delay the start to Bank of England interest rate cuts, the increase in joblessness bodes ill for the UK’s growth outlook. This will not be particularly welcome news for Rishi Sunak’s Tory Party, who appear to have based their call for early elections on the strength of Britain’s recent economic data. Attention among investors now turns to this morning’s monthly GDP data for April.

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