The theme for the month of a stronger USD and weaker EUR continued into the last trading day in May. The EUR continued to weaken with inflation in France and Germany coming in lower than expected - the stronger USD narrative was supported with higher-than-expected job openings in the US.
Fed speak yesterday from Harker and Jefferson seems to have suggested that the Fed will ‘skip’ a rate hike in June, but leave the door open for a hike in July.
Canadian GDP in March continued the downtrend, with growth dropping from 2.5% to 1.7%, lower than the 1.8% expected. Impact on GBPCAD was minimal as a result.
Overnight, the US debt deal won passage through the House, and is now pending approval from the Senate. A US default now seems to be averted.
* Daily move - against G10 rates at 5:00pm, 31.05.23
** Indicative rates - interbank rates at 5:00pm, 31.05.23
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All eyes today on EU inflation. Weaker than expected numbers from Spain, France, and Germany continued the month-long decline of the EUR. GBPEUR churned out another new high and today’s inflation numbers will be a risk factor on the continued performance of the pair. Buyers of EUR should be weary of this and weigh up the respective risk/reward. A move towards the Nov/Dec highs represents a 0.5% gain, whereas the lower end of the trading range could mean a 1.32% risk. US data points are on tap today, but given Fed speak now suggesting a pause in June, we could see markets take profit on the recent gains seen in USD, thus we could well see a retracement higher on GBPUSD and potentially EURUSD as well. But of course, strong numbers from the US today to suggest that the Fed will need to act in June will add to USD gains.
The word ‘skip’ could be the new buzzword to describe the Fed’s next likely monetary policy action. Fed speak yesterday suggests that the Fed could pause in June but be open to hiking in July. As a result market pricing for a June hike of 0.25% has dropped to a 36% likelihood, with a 0.25% hike in July up to a 84% likelihood. Should US job numbers continue to indicate a strong labour market then this pricing could change.
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