Daily Currency Update

USD - US Dollar

The dollar's brief rise against major currencies after the US GDP report highlights the FX market's bias towards negative US data over positive. Despite a significant slowdown in US Q1 growth from 3.4% to 1.6% and weak consumer spending, the core PCE inflation rate exceeded expectations at 3.7%. Today's PCE data could still surprise, impacting expectations. Key FX drivers—higher Treasury yields, favorable swap differentials, and falling equities—suggest a stronger dollar. Market adjustments may reduce anticipated US rate cuts, with a potential 0.4% core PCE rise today influencing a shift in short-term pricing dynamics. The dollar might soon realign with rates and equities, possibly reflecting higher levels above 106.0 in the DXY index.

CAD - Canadian Dollar

The CAD is gaining strength, currently trading near 1.3640, bolstered by increasing crude oil prices, now close to $83.80 per barrel due to geopolitical tensions. However, recent indicators of slower economic growth and inflation below forecasts in Canada might prompt the Bank of Canada to cut interest rates, potentially limiting CAD's gains. In the short term, the CAD will likely take cues from external drivers. Observe the USD/CAD exchange rate.

EUR - Euro

While a rate cut by the ECB in June is anticipated, focus is shifting to the policy trajectory post-June, with the ECB expected to deliver only 75bp of easing in 2024 and avoid consecutive rate cuts. Despite potential improvements in the eurozone’s economic outlook tempering a shift towards dovish policies, the June cut may not significantly lower rates. This limits potential declines in EUR/USD, even against rising USD rates, especially as eurozone economic fundamentals have improved compared to 2022. Today’s ECB CPI expectation surveys could show a slight decrease, but the stronger influence on EUR/USD will likely come from the dollar's performance, with expectations leaning towards a higher dollar and doubts about the pair sustaining above 1.0700.

GBP - British Pound

The pound and euro both responded similarly to US GDP data yesterday. The similarity in their reactions to US data since the year's start indicates that significant ECB-related volatility is unlikely.. The upcoming BoE meeting on May 9 will be key for the pound, though data could be more influential given the Monetary Policy Committee's divided stance.