News & analysis


It was a busy start to the week for the dollar, with ISM manufacturing data triggering a 0.5% selloff in the DXY index on Monday. Coming in at 48.7 the headline print not only landed below expectations for a reading of 49.5, but also marked a further slide from last month’s already contractionary 49.2. Perhaps more troubling for markets though, the weakness in headline readings was replicated across other indices. Prices paid slipped to 57.0, down from 60.9 and below expectations for a reading of 59.0. Most worryingly the new orders index collapsed to 45.4, down from 49.1 the month prior suggesting a sharp slowdown in forward looking activity. Not only does this point to a further slowdown in growth through Q2 after the economy expanded by just 1.3% QoQ annualised in Q1, but it also had spillover effects to other markets, most notably oil, which nosedived over 3% on yesterday’s release.

That said, we think there are a couple of counterpoints to yesterday’s downside surprise which warrant a degree of caution. First, the weakness seen in the ISM measure was not replicated in the S&P manufacturing reading for May, which at 51.3 indicated a modest expansion.  Similarly, the one bright spot in yesterday’s ISM report came from the employment reading, which at 51.1, overshot expectations to indicate job growth in the sector. All told, with indications that the labour market is holding up, supporting consumer demand, we still think it is too early to turn overly bearish on the US economy, yesterday’s soft headlines notwithstanding. Indeed, the US labour market is likely to be a major focus for the rest of the week ahead of Friday’s jobs report. Today, that starts with a JOLTS job openings print, which is expected to decline modestly to 8350k in April, down from 8488k in March. If realised, this would be consistent with a continued normalisation in the US economy, not the sharp slowdown indicated by the ISM reading, suggesting to us that risks are skewed towards a modest dollar retracement later today.


While Monday price action was largely dictated by the broad dollar, seeing GBPUSD up 0.5% to start the week, this morning it is BRC like-for-like sales data that is front of mind for sterling traders. The May print undershot expectations for a 1.2% YoY reading, coming in at just 0.4% to weigh modestly on the pound in this morning’s early trading. That said, while still disappointing, today’s numbers did unwind much of the underperformance seen in April when like-for-like sales indicated a catastrophic -4.4% contraction. With this morning’s data now in hand, we are inclined to write off last month’s print as an aberration due to grim weather and Easter effects. Instead, we think the data points to a temporary slowdown in consumer spending, and therefore the economic activity, after a knockout Q1. Even so, a modest expansion in Q2 still looks likely to us based on today’s print. Moreover, we continue to look for a further pickup in growth later this year as the impact of April’s National Living wage rise continues to filter through. If we are right this should provide a positive backdrop for sterling as we progress through 2024, even as traders knee jerk reaction is to sell the pound this morning on the headline disappointment.


Even as yesterday’s dollar slide saw EURUSD climbing 0.5%, the euro largely found itself in limbo on crosses, with domestic developments offering little impetus for the single currency. All told, this looks unlikely to change much today too. The focus for the week remains Thursday’s ECB meeting, where a cut in rates is all but guaranteed. Between now and then, only a handful of second tier data releases are set to land, including German labour market data for May, published this morning, and French industrial production data out tomorrow. That said, with short term rate expectations well anchored by recent ECB guidance, we doubt either release will be significantly market moving. Instead, all focus will be on any guidance from the ECB on Thursday and what this indicates for the likely rate path in the second half of the year, a dynamic that should see the euro continuing to tread water until then.


The loonie found itself at the back of the G10 pack through Monday trading with USDCAD failing to make any headway, even as the broad dollar sold off in response to the weak US ISM data. Granted the sympathetic sell off in oil likely didn’t help – WTI fell over 3% on the weaker than expected manufacturing print. But even despite this, the loonie’s underperformance was notable. The similarly oil sensitive NOK posted gains of almost 0.4%. To us, this suggests a degree of nervousness from traders in advance of tomorrow’s BoC meeting, where we expect a 25bp rate cut from the Governing Council. Given that markets are pricing the likelihood of this outcome at 85%, this suggests that more CAD underperformance is likely if our expectations are met. More concerning for markets, however, are the odds of a dovish steer from policymakers. Inflation is now back within the Bank’s tolerance band on all key measures, and an output gap that is negative and growing suggests that it is likely to stay that way. Against this backdrop, there is a distinct possibility that Governor Macklem could steer markets towards a faster pace of easing than is currently implied by markets. Swap pricing suggests only 2.5 rate cuts are likely this year. Based on the data, we think it should be more. With this risk in mind, we suspect traders will be wary of building long CAD positions in advance of tomorrow’s meeting, meaning another round of disappointing loonie performance is likely to be in store for today.



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