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UK and Euroland at odds with the US rate policy

The divergence in economic output between Europe (Euroland, Scandinavia and the UK) and the US was further highlighted last week. US retail sales and industrial production figures for March were both above market consensus expectations. In contrast, the German ZEW* survey for April reported little change in current conditions, while UK labour market data for February and retail sales figures for March showed ongoing signs of economic weakness.

This week could see further divergence, with the US GDP (Gross Domestic Product) figures likely to capture FX markets ahead of the Federal Reserve meeting on 1 May. For direct comparison though, the provisional April manufacturing and services PMI (Purchasing Managers’ Index) figures on Tuesday will provide the next clear evidence, and there could be signs of improvement for Euroland and the UK, but no improvement from the US. That could offer the GBP and EUR some limited and temporary support ahead of Thursday’s US GDP release.

 

*Zentrum für Europäische Wirtschaftsforschung / Germany’s Sentiment Index

FX markets appear more positive on USD

After last week’s close, the US dollar index appears to have another 2%+ of upside. Yet the risks are not one-sided, given the threat of FX intervention by the BoJ (Bank of Japan), and ongoing geopolitical tensions in Ukraine and the Middle East. Could the USD continue to strengthen? For the time being the prospects of US interest rate cuts continue to recede, whereas there is no such reversal in the UK or Euroland, in my opinion. For GBPUSD, the break beneath $1.24 at the end of last week, caused by comments by Bank of England Deputy Governor Dave Ramsden, risks further GBP selling pressure. EURUSD is holding up somewhat better, and GBPEUR could fall further below €1.16, having begun this week poorly, in my opinion.  

Could the BoJ defend the yen?

The yen showed weakness even after the BoJ announced its reversal of negative interest rates. USDJPY touched fresh multi-decade highs at ¥154.79 last week, and there were several comments by BoJ officials warning of possible monetary policy action if the weak yen prompts lasting consumer price adjustments. If the BoJ monetary policy decision does not change the direction of travel for USDJPY, then I think some further verbal intervention will initially be tried, and if that doesn’t work, then direct USDJPY selling could ensue thereafter. The JPY is the worst performing major currency of 2024, which is saying something given the surprise Swiss National Bank rate cut seen in Q1, and hints at further cuts by Swiss central bankers.

Hungary to cut this week, but Bank Indonesia and the BoJ are looking in the opposite direction

The central bank of Hungary is set to reduce interest rates this week, albeit market expectations are for a smaller reduction than the previous 75 basis point cut. This time the cut is likely to be 50 basis point (the markets suggest a 25 basis point reduction), with the recent depreciation of the forint being a contributory factor, in my view. If the cut is smaller than expected, that could offer support to the HUF, but the recent cooling of the Hungarian labour market would imply more rather than less loosening, in my view. 

As for the other central banks, I’ve already mentioned the BoJ’s potential intervention in FX markets, but is that essential if it delivers a sufficiently robust statement of intent around the reversal of the negative interest rate policy? 

At Bank Indonesia there is a small risk of tightening in interest rates over the next couple of meetings, but this week’s meeting appears to hold highly limited risk of such an outcome. It should not prove particularly market moving, in my opinion.

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