Current environment continues to remain dollar negative
USD: Dollar losses post FOMC proved relatively short-lived as US Treasury yields rose yesterday. Clearly, with commodities surging around the world and the US economy having the smallest output gap amongst the advanced economies, the scope for a pick-up in inflation in the US is high. A Fed refusing to shift the narrative on transient inflation does leave the Treasury market vulnerable to bouts of selling. That said, the rest of the world looks on a slightly firmer footing to absorb the rise in US Treasury yields than it did in February and March. For today, March US personal income data may be seen as old news, while final April readings of Michigan consumer sentiment should remain strong. The end of the month also warns of portfolio re-balancing flows.
CAD: USD/CAD has dipped below 1.23 with firmer commodities and CAD-supportive yield spreads alongside the generally positive risk backdrop and the soft USD undertone broadly all point towards an extension of the CAD rally in the near/medium term. USDCAD’s drop aligns more closely with estimates of fair value currently (low 1.21s).
EUR: The focus today is on 1Q Eurozone GDP data, where another decline is expected to generate headlines of a return to a technical recession. The forward-looking FX market can focus on the emerging positives, where sentiment indicators are rising sharply, the vaccine roll-out is gaining pace and there could be a scenario where EU Recovery Funds start to be released in July. The EUR should now be more resilient to risk aversion and higher US yields. EUR/$ has had a relatively uninterrupted run higher in April and may be due some consolidation into early May. EUR/USD will likely be supported in the medium term ahead of push to the highs of 1.2350 toward the latter part of the year.
GBP: Financials are performing well, supported by steeper yield curves. Year-to-date UK's FTSE has under-performed (+7.7%) the Eurostoxx 50 (+12.5%) and the S&P 500 (+12.2%). Further out-performance of financials could see a rotation towards the FTSE, where financials make up 18% of the index. Most analysts continue to expect that the GBP/USD can break above 1.40 in the coming months. Next week's BoE meeting could prove interesting.
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