Market Report - 30/05/2024
ECB rate cut seemingly imminent ; GBPEUR reaches 21 month peak
It’s been another volatile week in the FX markets, with numerous high-tier risk events and macroeconomic data providing instability for major peers.
Fears over sticky inflation, and potentially even stagflation are hitting the markets this week. Investors are growing anxious that global interest rates will stay higher for longer, a worry that has knocked shares in recent days, as the yields (or rate of return) on government bonds push higher.
Last night, the UK’s FTSE 100 index fell for the sixth day in a row and traders are bracing for further losses today.
As a result, Central Banks are attempting to slow growth through high interest rates to dampen inflation, but without cooling their economies so much that unemployment jumps. But, with US inflation running at 3.4% last month (still well over the 2% target), confidence for a soft landing is faltering.
Yesterday, inflation in Germany came in higher than forecast. Interestingly this is following a print which showed German inflation indicated a decline in May. As a result GBP/EUR surged to a new 21-month high of 1.1784, although experts caution that levels over 1.1765 may not be maintained; citing GBP rate cut expectations as the driver for this.
The German inflation data revealed a significant deceleration, which is likely to lead to a softer Eurozone inflation print on Friday and pave the way for consecutive rate cuts by the European Central Bank in June and July. This put pressure on euro exchange rates across the board, and could be reason to expect a decline in EUR/USD and a potential uptick in GBP/EUR.
Looking at the economic calendar for the remainder of this week; today we have the release of Business and Consumer sentiment for the EU at 10am, followed by UK House Price data tomorrow morning. This is before ending with the eagerly awaited release of the EU CPI data at 10am on Friday morning. Investors will be keeping a keen eye on these data releases for fresh impetus.
Across the pond, this afternoon there is a second estimate for US Q1 GDP which is due to be released alongside US jobless claims at 1:30pm. Investors will be monitoring the release from the second estimate of GDP in the event that the US economy springs a surprise, and displays a better-than-expected reading which may lift the Dollar further.
The Dollar strength in the first half of this week has seen GBPUSD fall from its peak level at 1.28, falling below the 1.27 mark. Meanwhile, EURUSD had been rallying higher since mid-April but has now seen consecutive daily retracements following a significant rebound in US yields. This is driven by renewed speculation that the Fed may not begin cutting rates until Q4 or beyond, following a range of hawkish comments from Federal Reserve officials. Some economists are now suggesting that there is now only a 40% chance of a rate cut by September.
To add further fuel to the fire, the U.S. Conference Board's consumer confidence index saw a five-point increase on Tuesday. This provided some strengthening to the Dollar since it negated some concerns that U.S. inflation would continue to rise despite strong consumer demand. This will fuel rumours once more that the Federal Reserve may even decide to hike interest rates rather than lower them.
Elsewhere, the weekly unemployment claims in the US are forecast at 218,000, a small increase from last week’s reading of 215,000.