Parky’s quick take: 20 May 2024

Neil Parker, FX Market Strategist, shares his views on currencies and FX markets for the week ahead.

20 May 2024 . 3 min read

What’s happening with currencies and FX markets this week?

At a glance: what’s happening with FX markets this week?

GBP faces a big week of data: will it hold up in the face of those releases?
The Federal Open Market Committee (FOMC) minutes may dampen any near-term rate cut hopes
The EUR makes headway against the USD and in spite of the data
Central banks to leave rates on hold despite the increasing global pressure for loosening

GBP faces a big week of data: will it hold up in the face of those releases?

After last week’s mixed bag of UK labour market figures, the FX markets will be closely watching the UK releases of April consumer prices, retail sales and provisional May manufacturing and services PMIs.

The April consumer price inflation figures are expected to report a sharp drop in the headline and core rates of inflation, with the headline rate expected to get close to target thanks to a big drop in the energy price cap. The core rate should also fall, but not by as much and won’t be anywhere close to the target. As for retail sales, after a damp March undermined sales volumes ahead of Easter, more poor weather in April is expected to have prompted a contraction in volumes. The markets are pricing in falls in both of these indicators and the outturns might not be as dramatic but are unlikely to be positive. GBP is already trading close to levels, in the low $1.27s and €1.17s, that have appeared to be difficult to sustain a break above in the past – and could once again limit the upside. My focus would be on the downside for GBP this week.

The GBP strength enjoyed last week saw the pound have its best week against USD in over two months. However, it was materially more about USD weakness than GBP strength, since the key drivers for the move came post US data releases for inflation, retail sales and industrial production.

If there is something that could blow the GBPs progress off course it would be further indications from the Federal Reserve that it has no plans to ease policy anytime soon, and that could be observed in the release of the minutes of the May Fed FOMC meeting on Wednesday.

Will the European Central Bank stay on course for a cut in June?

Meanwhile, the Euro zone has seen its currency also make gains, but again the driving force has been the USD. The decision of the European Central Bank Governing Council meeting, which is just under three weeks away, looks to a very high probability to be an interest rate cut, and I can’t see much due for release prior to the meeting that could blow that outcome off course. Just before the announcement, provisional May consumer price inflation figures are released and that is likely the only thing that could alter the ECB’s thinking, but it would have to display a significant overshoot/turnaround in inflation pressures, in my view. I would note that Italian CPI inflation (final for April) was revised down to 0.9% year-on-year last week.

The rest of the world: central banks to leave rates on hold

The central banks across most main geographies are looking to start reducing interest rates as the pace of inflation slows. There are, of course, some economies where there appears little need for monetary loosening, and others that may be waiting for the Federal Reserve to lead the way. For the central banks due to announce this week, the Hungarian policy decision is expected to be a 50 basis point cut, but New Zealand and Indonesia are predicted to leave policy on hold. The Reserve Bank of New Zealand could alter its projections for growth and inflation such that the timing of the first rate cut is brought forward, albeit not to match what the markets are already predicting. Bank Indonesia remains governed by the performance of the rupiah, so there is no short-term prospect of an easing, in my opinion. That said, the central bank could be tested into reducing interest rates if inflation continues to undershoot.

Finally, the news from Iran, where the President and Foreign Minister died in a helicopter accident, risks some regional instability, particularly because President Raisi was the frontrunner to succeed Ayatollah Khamenei as Iran’s Supreme Leader. Could Raisi’s death lead to renewed protests in Iran, or a crackdown by Iranian security forces? Are there USD-positive risks to this news or is the outlook for FX markets still firmly fixated on monetary policy?

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