Strong results from the US 10Y auction pushed yields lower, pulling the USD down slightly and boosting risk assets. Broad USD losses continued overnight ahead of today’s double header event risk. US CPI data is expected to show a 0.1% rise in headline prices, maintaining a 3.4% Y/Y gain. This outcome will influence USD trading before the FOMC announcement, though moves are likely to be limited. No change in rates is expected, and guidance may remain the same. The SEP may indicate slower growth, higher unemployment, and higher CPI compared to March. The dot plot may shift from three cuts to two, which would modestly weaken the USD; fewer cuts would be bullish. Chairman Powell’s press conference may emphasize patience and the Fed’s commitment to price stability, potentially softening hawkish interpretations. The Dollar Index needs a more hawkish Fed message to sustain its recent gains, with key support at 105.10.
The CAD is little changed after inching back from the upper 1.37 area as the USD retreated. Firmer risk appetite and a slight narrowing in US/Canada spreads are minor positives for the CAD, but the improvements are not significant enough for a major rebound. Fair value has edged slightly lower but remains just above 1.38. Further CAD gains appear limited from a fundamental perspective until the FOMC meeting clarifies the US rate outlook. Observe the USD/CAD trend.
The EUR is slightly higher, but headwinds from the snap election call in France remain, reflected in wider OAT/Bund spreads. The 10Y bond yield differential has edged out to 61bps, nearing the 62-65bps range seen in recent years. Significantly wider spreads will weigh on the EUR, regardless of the broader USD tone. Observe the USD/EUR trend as well.
UK data showed soft growth trends in April. Monthly GDP was flat against expectations of a 0.1% drop, with weak manufacturing and construction. Service sector activity rose 0.2%, but retail was soft, possibly due to weather. The economy grew 0.7% in the April quarter, matching expectations, but sluggish growth won't aid the government. Election polling worsened for the Conservatives, with a Sky News/YouGov poll showing record low support at 18%, with Reform close behind at 17%. Labour's support dipped slightly to 38%, and the LibDems received a post-manifesto bump to 15%. Additional polling indicates 45% of voters think the Conservatives have run the worst campaign so far.
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