News & analysis

Markets found themselves trading in circles for much of the holiday-shortened week. Having opened the week in the same risk-on mood as the week prior, the hangover wasn’t far off. A few faulty Treasury auctions and a strong beat in consumer confidence indicators saw markets once again question the extent to which the Fed could cut, even as the latest beige book of economic conditions leant in a dovish direction. Markets took another u-turn on Thursday as second quarter GDP data held flat, but the composition turned notably weaker with a downgrade to personal consumption. Finally, however, Friday’s PCE report for April gave traders direction. The data confirmed the underlying trend of disinflation in the US, spurring risk sentiment once again and leading the dollar to trade lower alongside yields.

Elections were another notable theme in markets this week. Not only is the UK election debate picking up steam, but South Africa also took to the polls in an election that could spur further volatility next week once the official outcome becomes clear. The election theme doesn’t stop there heading into next week either. A historic election is set to take place over the weekend in Mexico, where the country looks all but guaranteed to elect its first female President, with Morena set to remain in power for another term. Only two days later on June 4th, it is India’s turn to head to the polls. A third victory in a row for Narendra Modi and the BJP looks all but certain. With both elections set to procure continuity outcomes, the impact for FX markets should be relatively muted. Instead, monetary policy should be back in focus for traders, with rate decisions from the BoC and ECB front of mind. We expect both to cut rates, joining the SNB and Riksbank as the early rate cutters this cycle. But with this largely signalled in advance by ECB policymakers, the decision should prove more bearish for CAD. Losses against the dollar could be perpetuated will depend on how US nonfarm payrolls prints on Friday. In particular, a second undershoot in a row is likely to put the prospect of a July rate cut back in play less than a week before the Fed has to deliver their June rate decision, and an updated set of SEPs. In contrast, an upside beat would likely move the conversation back towards the idea of no US rate cuts this year. Either way, this leaves US data and Fed expectations key to broad market price action next week once again.

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Authors: 

Simon Harvey, Head of FX Analysis

María Marcos, FX Market Analyst

Nick Rees, FX Market Analyst

 

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