Weekly Brief

02 June 2023

GBP

Having bucked the broader trend and surprisingly increased during the previous month, the Nationwide House Prices declined by the fastest pace in 13 years last month, highlighting the negative impact to the market from the plethora of BoE interest rate hikes over the past year and a half. House Prices decreased by a whopping 3.4% during May, with the annual fall accelerating from 2.7% during April. Nationwide also believe that higher interest rates will weigh heavily on the sector, which sounds like a sensible comment, given the backdrop.  

In separate news, the BoE also confirmed that overall mortgage debt of £1.4Bn was repaid during April, representing the largest net repayment since records began in 1993, as consumers scramble to reduce their overall interest burden. The UK also bucked the trend on weakening Manufacturing PMI’s, with the latest data increasing from 46.9, to 47.1. Markets had been expecting a weaker report, in-line with recent weaker manufacturing data elsewhere. However, the data still remains well below the key 50 threshold.

The pound has also seen a fairly strong week, with GBP/EUR surging comfortably beyond 1.1650 for the first time since the end of last year. Having declined from over 1.2600 to 1.2300, GBP/USD is also finishing this week on a strong footing, with the pair moving back over 1.2530, further highlighting the recent strength in the pound.

This commentary does not constitute financial advice

- Andrea Efthymiou , FX Dealer

EUR

Weaker economic data continues to dominate the European agenda, with evidence this week that inflation has fallen at a faster pace than had been expected. Regional Harmonised CPI declined from 5.6% to 5.3% on an annual basis during May, having been expected to have fallen only marginally to 5.5%. Headline inflation, which includes the volatile groups such as food and energy, slipped from 7% to 6.1% over the same period. There were also substantial decreases among German and French inflation data. French annual CPI dropped to 6% during May on a preliminary basis, data highlighted on Wednesday, with Germany’s inflation slipping a whopping 1.3% from 7.6% to 6.3% over the same period, to its lowest level in more than a year.

Despite the declines, ECB Chief Christine Lagarde, suggested that there was ‘no clear evidence’ that inflation had peaked, pledging to increase European interest rates further at the next ECB meeting, and highlighting that it is still too early for the ECB to lower its guard. In other economic news, Germany continues to suffer from weaker global manufacturing demand, which recently helped to push the country into a recession.

Having declined from over 1.1000, to under 1.0650, EUR/USD is currently attempting to find support and had moved back over 1.0750 as of yesterday (Thursday) afternoon. Looking ahead, next week’s Regional Retail Sales are expected to recover on an annual basis somewhat, after the 3.8% decline during March, with Regional GDP expected to remain at (or near) 0.1% during Q1.

USD

Thankfully, both the House of Representatives and Senate have now passed the debt ceiling deal, which removes the risk of a catastrophic US default, and what would have probably been a global financial disaster. The House voted 314 – 117, with the Senate voting 63 -36 late yesterday evening. The Bill will now be signed-off by Joe Biden, and we can all hopefully move on for a couple of years before the process likely begins again. The news has certainly helped to lift market sentiment, albeit only marginally.

Despite the positive news on the debt ceiling deal, markets remain cautious and skittish. The Fed have hardly helped to settle those nerves, with mixed messages often clouding the narrative. Among the key speakers this week, the likes of Loretta Mester sees ‘no compelling reason’ for the Fed to pause anytime yet, however, Philadelphia Fed President, Patrick Harker, had a different view. He suggested that the Fed should not pause (rate) hikes, but simply skip hiking this month (June), which to most people is still a pause, but let’s not get bogged down by the detail. Harker’s desire to double down on a pause, sorry skip, has helped to lift sentiment. The Fed’s Jefferson also highlighted that any pause does not necessarily determine that the Fed have reached their terminal (or final) rate, but you try telling the market that. Thankfully, the Fed’s self-imposed quiet period kicks-in this weekend.

With such varied views from the Fed over the past few weeks, market-implied pricing for this month’s Fed meeting has been choppy, to say the least. Despite the graph often resembling a graphic equaliser from the 1980’s, markets have now moved strongly in favour of a pause, and current pricing* has now decreased to a fairly low (22%) chance for another 25bps hike, which reads as a pause (or skip) to us. Today’s May Nonfarm Payroll (NFP) report could further impact that metric. Markets currently expect gains of around 190K on the headline, after last month’s 253K increase. As always, we need to be alert for any large revisions to previous data, as well as the overall unemployment rate.

Ahead of the payrolls, both the latest JOLTS (job openings) and ADP private payrolls data beat estimates, with the latter perhaps suggesting another healthy month for the NFP’s. In other news, recent weaker manufacturing data continued in the US, with the latest ISM Manufacturing PMI slipping to 46.9 from 47.1 previously, following the trend elsewhere. The key Services PMI data is released early next week.

The dollar has had a mixed week, with the dollar index (DXY) initially rallying over 104.00 for the first time since March. However, the dollar then consolidated somewhat after the news on the debt ceiling progress (a Fed skip) and the weaker Manufacturing PMI, with the DXY slipping back to below 103.00. Having risen to above 140.00 on those expanding US/Japan interest rate differentials, USD/JPY has also declined to back under 138.90 over the past day. Aside from the ISM Services PMI, the data calendar in the US looks pretty thin over next week.

*As of Thursday afternoon

CAD

Canada’s economy expanded by 3.1% on an annual basis during Q1, comfortably exceeding analyst estimates of a 2.1% gain and the BoC’s own projections of 2.3% for the period. With recent inflation data also beating projections, the news has increased the pressure on the BoC to hike Canadian interest rates, after recently announcing their decision to pause. The BoC announce their latest policy decision next Thursday, with the BoC’s policy rate currently at 4.5%.

The minutes of the last BoC meeting also suggested that they refrained from hiking rates last month, as they wanted to wait for more evidence of the impact of their previous cumulative rate hikes. Does that mean a hike this month then? Perhaps, given the stronger data.

Unlike in the US, Canada’s May employment report is not reported until the end of next week, and after recent gains, some moderation is expected among headline gains. However, the overall unemployment rate is still projected to remain at, or near, 5%.

USD/CAD has also retraced during the week and after reaching a peak at 1.3650, the pair slipped back to test 1.3500. A spike in the spot price of oil has helped the Loonie recover somewhat, but the pair remains well above the recent low of 1.3300 set during the middle of April.

AUD & NZD

Australian inflation rose at a faster-than-expected pace of 6.8% during April, having been expected to have increased by 6.4%, after last month’s 6.3% jump. Furthermore, Australian house prices climbed for the third month in a row during May, with the combined data suggesting that the RBA could well be persuaded to hike Australian interest rates again next week, in an attempt to quell surging demand. Markets currently expect around a 33% chance* for a 25bps move. The RBA also reiterated this week that they remain committed to tackling surging inflation, which has also led to increased bets on future RBA moves.

The news did little to boost the Aussie, however, with AUD/USD declining back under 0.6470 earlier this week, although at the time of writing, the pair has staged an impressive recovery to back over 0.6600, aided by a broadly weaker greenback. With little keynote news or events out of New Zealand, NZD/USD has broadly followed AUD/USD moves, with the pair slipping back under 0.6000, before also staging a later recovery back over 0.6100. Aside from the RBA, next week also sees the latest Australian GDP data, with growth during Q1 expected to have increased by around 0.7%, which is up from 0.5% previously.

*Source: CME Markets