Strong US data and doubts over rate cuts continues to support USD

Good morning

US data continues to beat expectations to the upside, yesterday it was retail sales that came in better than expected, both in terms of the headline and also a revision higher to the previous reading.  Rather than send the US dollar scurrying higher, it served more as general support which capped GBPUSD near the 1.2500 area and similarly EURUSD around 1.0665.  Neither pair has seen those levels since, GBPUSD currently 1.2445 and EURUSD 1.0620, leaving GBPEUR at 1.1715.

UK unemployment numbers out earlier this morning didn’t offer much help for GBP, with the unemployment rate ticking up to 4.2% from 4% expected and a drop of 156k in the employment numbers.  From an inflation perspective, the average earnings held up at 6% and 5.6% (excluding and including bonuses).

USDJPY took advantage of that additional support for USD, the pair climbed to a high of 154.60 earlier this morning, now just a few pips lower at 154.45.  We’ve has the usual verbal intervention but nothing more serious as yet.  HSBC have chances of intervention at 5 out of 5 although I have seen others who, while the acknowledge the increased risk due to the weak yen, think Japan are more likely to seek support from the G7 at their June meeting.

The key issue for the time being remains the possibility of Fed rate cuts.  Feds Daly was the latest Fed official to make it clear Fed do not need to rush into rate cuts, preferring to be sure inflation is heading back to 2% before calling for easing.  Meanwhile, UBS have raised the possibility of US rates moving higher to 6.5% by mid-2025 if inflation does not recede.  This is not their base case, that remains for two rate cuts this year, but is something they see as a possibility.

The world is waiting to see what response Israel will make over the Iran attacks.  Everyone, US, EU and Iran included, are making it clear they see no need for escalation although Israel still vow some sort of response.  If further action is taken by Israel, Iran have said they would respond.  Seems to be in the hands of the Israelis at the moment.

Canadian inflation numbers are out this afternoon and we’ll hear from BoCs Macklem this evening.  For the record USDCAD is up at 1.3800, the highest level since November, while GBPCAD is 1.7160.

We have plenty of other central bank officials on the calendar today including Feds Powell who I believe speaks with Macklem this evening.  Several other Fed and ECB officials on the calendar, while BoEs Bailey is also in todays line-up.  He speaks ahead of the UKs latest inflation numbers that are out early tomorrow morning.  The market is looking for a drop in both the headline and the core readings, at around 3.1% and 4,1% respectively.

In other news, two items caught my attention. One was the furore over the Chinese runner He Jie who won the Beijing half-marathon but only after the three leading African runners all seemed to slow and wave Jie through, waiting for him to cross the line first.  Organisers are investigating the incident, although there is an attempt to say the African runners were in fact pacemakers rather competitors.

The other item was that a couple were divorced by mistake after a computer error at law firm Vardag.  A staff member opened the wrong client file when trying to finalise a divorce for a different client.  The courts have said the decision has to stand.  The newly divorced couple were separated and in the throes of negotiating finances before their divorce was to be finalised.  I’m not sure how the divorce impacts those negotiations but from what I read the husband seems happier with the mistake than the ex-wife who was the one who filed for the divorce. 

Finally, Chelsea have their hopes of European football next year a boost with an impressive 6-0 win over Everton last night.  They have a game in hand over Man Utd who are currently in seventh place, and would go ahead of them on goal difference if they did get the three points in their next match.  Mind you they have the small issue of the FA cup semi-final against Man City to contend with first, that’s this coming Saturday.  Before then it’s back to Champions League quarter-final action today and tomorrow.  The first legs were incredibly exciting matches, lets hope for more of the same. 

Have a great day.  Not sure its going to be warm and sunny, forecast suggests a wet afternoon, but hopefully will be less wet and windy than yesterday.  And we can do without the hail as well please!

-  10.00 German ZEW

-  13.30 US housing starts, building permits

-  13.30 BoC CPi

-  14.00 Feds Jefferson speaks

-  14.15 US industrial production

-  15.30 ECBs Nagel speaks

-  17.30 ECBs Villeroy speaks

-  17.30 Feds Williams speaks

-  18.00 BoEs Bailey speaks

-  18.15 Feds Powell speaks

-  18.15 BoCs Macklem speaks

-  21.00 ECBs Nagel speaks

-  23.45 NZ CPI

-  00.50 Japan trade

-  07.00 UK CPI, RPI, PPI

I didn't win enough for picking the first three horses in the Grand National

Good morning

With so much going on in the world right now it would be easy for me to overlook a very important point, so I’ll get it out of the way first.  Anyone who read Friday's report will have seen the three names I picked out for the Grand National.  They finished first, second and third.  I’d backed all of them to finish in the top four, as such came out something of a winner although with small stakes and quite short odds it was hardly what anyone would call a huge windfall.  Had I thought of trying to name the top three I’d have won a considerable amount more money, but I guess I should be happy with what I have.  Doubt I’ll ever manage that feat again mind you.

The US dollar continued to push higher Friday, GBPUSD sank to 1.2430, EURUSD slipped to a low of 1.0625, both the lowest levels since November.  There had certainly been some safe-haven USD buying ahead of the weekend as the world waited to see whether Iran would attack Israel.  They did,  with a huge wave of drones and missiles, but Israeli defences together with US and UK help, the vast majority of those missiles were intercepted.  It is almost a win for all sides, Iran have retaliated in a large way but no major damage has been inflicted.  Now we wait to see whether Israel retaliate, I suspect they won’t, but the threat of escalation is certainly there and one Israeli official has been quoted as saying there would be a significant response, although US seem to have made it clear that they would not support any counter offensive against Iran.

The USD strength is not all about safe-haven buying though.  A series of strong economic data has pushed back the chance of rate cuts, remember it was not that long ago the market was looking for up to six rate cuts through 2024.  Now the market is fully pricing in just one cut, but some are thinking we’ll be lucky to see any cuts at all this year.  This compares with the ECB who look almost certain to cut in June, while BoE remains a bit more of a mystery but with a weaker economy than the US we must surely be looking at an earlier cut from BoE than Fed as well. 

The BoE review by ex-Fed Chairman Bernanake was concluded Friday, with a series of reforms to rate forecasts and guidance proposed.  BoE has said they will act on the proposals, but it wo;t be an overnight change, they have said there will be more specifics by the end of the year.

Meanwhile the situation in Ukraine is not sounding good, with talk of shortages in supplies for Ukrainian forces and Russia looking likely to make gains as it prepares for further pushes into Ukrainian territory.  Europe and US seem to have slowed down the provision of ammunition and supplies which will take its toll on Ukraine.  New sanctions over the weekend see deliveries of certain Russian metals banned, leading to a jump in metal prices on the LME.  Many, myself included, will be surprised that this was not already in place.

USDJPY continues to make new highs, it is now 153.95 and with a strong US dollar there is little Japan can do to turn the tide.  Intervention would likely offer just better levels for the market to get long, so for now I wouldn’t be surprised to see Japan sitting back and offering just the usual verbal intervention.  It would need pretty coordinated  action from other central banks to turn this trend.

I should mention gold as well, which spiked to $2,430 Friday afternoon but fell back almost $100 to $2,335 before closing at $2,345.  It did try to push higher when trading reopened but now sits just above $2,350.  It will take a brave man to bet against us seeing higher levels in gold through the week. 

We have a fairly busy week ahead with UK unemployment tomorrow, inflation Wednesday, and retail sales Friday, while we will also hear from BoEs Bailey a couple of times this week.  Before then we have US retail sales this afternoon, the week also brings EU, CAD, NZ and Japan inflation and Aussie employment.

In sport, congratulations to Scottie Scheffler who won the US Masters golf for the second time, and perhaps became one of the few pre-tournament favourites to win the green jacket.  It was a weekend of surprises in football, with both Liverpool and Arsenal losing and as such potentially putting the title into the hands of Man City.  With Villa winning and Spurs losing handsomely to Newcastle, a top four finish for Spurs is in jeopardy.  They still have to play Arsenal, Liverpool, Man City, and Chelsea, and they’ll need to raise their game if they are going to get any points from those.  A finish outside the top six could be a possibility.

We were treated to  some pretty decent weather over the weekend, with plenty of sunshine and temperatures creeping just above 20°c for some of the time.  I hope you enjoyed it while it lasted, we’re likely to see heavy wind and rain today and the rest of the week looks pretty miserable as well.  Even if it can stay dry, which seems unlikely, temperatures will be back below 15°c.  It has better be a decent summer!

-  10.00 EU industrial production

-  12.15 BoEs Breeden speaks

-  13.00 ECBs Lane speaks

-  13.30 US retail sales, NY empire state manufacturing survey

-  01.00 Feds Daly speaks

-  03.00 China GDP, industrial production

-  07.00 UK unemployment

ECB on track to cut rates in June, while Fed may not cut at all

Good morning

US PPI came in very slightly softer than expected yesterday but this has done little to slow the rise of the US dollar, which continues to make higher levels against most majors as the markets continue to question the notion of rate cuts in 2024. 

GBPUSD is now down to 1.2505, EURUSD 1.0675, putting GBPEUR at 1.1715, with EUR a little more on the defensive after the ECB rate meeting.  They did keep rates unchanged yesterday but said nothing to suggest a June rate cut is off the table, Lagarde making it clear ECB would not wait for Fed to cut rates before they take  action.  Indeed it is reported that some members were ready to cut rates yesterday.  Meanwhile USDJPY sits at 153.35, oblivious to the ongoing verbal intervention from Japanese officials. 

UK GDP this morning came in at +0.1% as expected, hardly ground breaking stuff but at least it is still in positive territory.  Industrial production data was stronger than expected but this wasn’t enough to stop the GBPUSD sell-off.  I am wondering whether we are seeing USD buying ahead of the weekend as we did last week as a flight to safety amid renewed concerns Iran will attack Israel in retaliation for the recent Israeli attack on the Iranian embassy in Syria. 

US have apparently asked China to ask Iran to not attack Israel, in something that sounds very much like playground type tactics.  Iran has reportedly said it will respond the Israeli attack but in a way that will not escalate the middle east situation.

At midday we will see the Bernanke review of BoE procedures which is likely to lead to reforms at the central bank in terms of forecasting and communications but should have no impact on monetary policy.

Gold prices have continued to make new highs, trading within a whisker of $2,400.  This comes despite the USD strength we have seen and the support seems to be coming from official purchases, such as China’s building of gold reserves.  I read an interesting article yesterday that suggested there was more to China’s gold buying than simply holding the metal, instead it will become part of a plan to move away from dollarisation.  USDCNY remains in the high 7.23s.

China trade overnight showed a $58.5bn surplus which looks healthy enough but was over $10bn lower than expectations and less than half the number reported for February.    

It wasn;t a good night for English teams in the Europa league quarter finals, with Liverpool suffering a heavy 3-0 defeat at the hands of Atalanta and West Ham losing 2-0 to Bayer Leverkusen.  Plenty of work for both teams to do in the second leg.  Aston Villa managed a 2-1 win against Lille in the Europa Conference quarters.  I’m hoping English teams do well as it may mean an extra Champions League place for English teams next season, which in turn would take some of the heat off Spurs needing a top four finish.  Spurs take on Newcastle in the 12.30 match tomorrow.

In golf, big hitter DeChambeau leads the Masters by one shot over Scheffler.  Some players didn’t manage to finish their first round after the start was delayed for thunderstorms.  This means many will have to finish their first round and then go straight into their second round.  I know they are all quite fit these days and they don’t have to drag their own bag around but even so that is enough to make life a little uncomfortable.  They may not even have time for a couple of pints and a sandwich at lunch time. 

One other sporting event this weekend is the Grand National.  I’m not a huge horse racing fan, much to the disappointment of my eldest who is quite a fan and would dearly love me to own a couple of race horses.  I’m not actually suer if the Grand National really appeals to horse racing fans in the same way that it appeals to the rest of the nation.  It is one of the biggest days in the bookies calendar that’s for sure. 

To pick a winner you might as well draw a name out of the hat.  Each way bets or top 4/6 place finishes are safer if you’re more into not losing money.  Looking at the names, I Am Maximus is pretty cool, while Delta Work leads me to think of options trading, something that as you know is a big part of our business.  Otherwise, Rachel Blackmore on Minella Indo could be worth a flutter.  Do bear in mind though that my knowledge of racing is minimal and should only be taken with a pinch of salt.

Could be a decent couple of days over the weekend weather-wise.  Might even hit 20°c today.  I’m in the Isle of Wight later today to see some clients, friends and acquaintances, must remember the sunglasses and suntan lotion… 

Have a great weekend as and when it comes.

-  12.00 BoEs forecast report

-  12.00 ECBs Elderson speaks

-  15.00 US michigan sentiment survey

-  19.30 Feds Bostic speaks

-  20.30 Feds Daly speaks