Equity futures are in the green this morning, in line with a rebound in Asian equities overnight after a very rough week for risk sentiment. Some recovery in risk appetite today could help mitigate recent losses for G10 FX currencies and take some steam out of the dollar rally for now. Still, we’ll need to see a material stabilization in sentiment in the coming days to actually reverse some of the recent FX moves. The market’s concerns around the combination of Fed tightening and expected global slowdown continue, however, to argue in favour of volatility and instability in risk assets. Today’s main focus in the US is the University of Michigan survey for May, with the main sentiment gauge expected to have inched lower while the 1Y inflation expectations index may have increased marginally to 5.5%.
Weak stocks and elevated volatility (VIX) continue to drive the CAD. The CAD has shown a degree of resilience, however, with new lows for stocks not being met with excessive pressure on the currency and this week’s range highs holding the USD’s advance. Most analysts continue to suggest a reversal for the CAD as recent weakness is purely a reflection of elevated market volatility and there is still a solid fundamental story underlying the CAD (growth, terms of trade, hawkish central bank).
EUR/USD broke the key 1.0500 support yesterday while uncertainty around the implications of the Ukraine war in Europe remains elevated. Text major support to watch is the 1.0340 January 2017 low. A break below such a level would make the risk of EUR/USD hitting parity quite material. A break below 1.0340 may not be a story for today as a rebound in risk assets may ease some of the dollar's momentum. The eurozone calendar includes industrial production figures for May, as well as a bunch of European Central Bank speakers. In this environment, another technical break lower in EUR/USD in the coming days is a very material risk.
The pound is trying to find some support around the 1.2200 level after what has been a freefall from the upper half of the 1.20-1.30 range. Yesterday’s weaker-than-expected growth numbers in the UK seemed to feed the narrative that the Bank of England might soon reach a peak in its tightening cycle as the British economy materially slows down. The way ahead remains very uneven for the pound considering that markets still have a good deal of monetary tightening to price out. With Brexit-related risks back to the forefront and the downside risks for GBP remain quite significant and a move to 1.2000 next week may be on the cards.
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