Yesterday saw the S&P 500 sell off 4%, led by consumer stocks. The fact that some of the biggest main street names are under pressure on the back of profit warnings is a reminder that the squeeze on real incomes is starting to hit home. Given the current environment, investors are now buying into the fact that tackling inflation is the number one priority of the Fed - and the Fed will not easily be blown off course. For today, the US calendar is light with just initial claims and existing home sales for April. Housing looks to be one of the most vulnerable sectors of the US economy, but its slowdown (and its effect on dragging core inflation lower) looks a story for much later in the year.
The CAD has moved steadily higher over the last 24 hours and is currently trading at 1.2825 at the time of writing. The overnight session saw improved risk globally while volatility across the markets edged lower providing a further lift for the CAD. External factors have largely shaped the CAD’s performance over the recent past week, but focus turns back to domestic data this morning, with the latest snapshot inflation. Observe the USD/CAD chart.
Providing the euro a little support this week has been even more hawkish commentary from the European Central Bank. We had felt that the market would struggle to price in more than 75bp of ECB tightening this year, but central bank hawks have introduced the idea of the ECB moving in 50bp increments. For today, look out for the minutes of the April ECB meeting, where again it might choose to emphasize the more hawkish elements. EUR/USD has had a bounce to 1.0550 and with the global environment remaining challenged, EUR/USD could today drift back through 1.0450/60 to 1.0400.
The GBP has been very volatile against both the EUR and the USD over the last month. Expect this volatility to continue given much uncertainty about the policy path for the Bank of England (BoE). We have seen the market bounce to 1.2500 this week but with the difficult external environment, we expect a break of 1.2330 support in a move back to the 1.22 lows.
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