News & analysis


Despite the ECB now becoming the fourth G10 central bank to begin easing before the Fed, this had little effect on DM currency markets yesterday. So too did the downgrade in the US Q1 unit labour cost data on the final reading, which landed at 4%, significantly undershooting expectations for a 0.2pp upward revision to 4.9%. The tight ranges across both DM currencies and the expanded majors more broadly doesn’t come as a surprise, however, as the message from the ECB yesterday was broadly expected and markets have already adjusted to the weakening US consumer backdrop, which was merely reinforced by the revised Q1 ULC data. Moreover, we suspect traders are awaiting fresh data on the health of the US economy and what that means for Fed policy moving forward to determine the next leg in the greenback. Once gauged, rates markets should start to effectively price any divergence in monetary outlooks, which at present remain tightly correlated still. This should have spillover effects in FX markets, where the dollar remains highly attentive to the move in yield spreads.

The first piece of data to this effect comes today in the form of May’s payrolls at 13:30 BST. Expectations are for a print of around 180k, which if realised would keep the unemployment rate stable below 4% and show little change in hiring conditions from April. This should keep markets hesitant in pricing any easing before the Fed’s September meeting and provide the dollar with further support at the 104 handle. Risks are tilted towards the downside, however, with the Bloomberg whisper number sitting at 160k. There is a good reason for this too. All five of the big data measures that publish before the official payrolls measure are pointing to a below consensus reading. Seasonal factors are also a drag as employment growth tends to slow markedly over the Spring months when the labour market is tight. If this downside risk is realised, the tail risk of a cut from the Fed in July should increase from 18% currently, with a run towards 50% dependent on how next week’s inflation report lands. Whether this is negative for the dollar depends on how weak the data comes in as any indication that the US economy is vying for a hard landing will likely spur defensive positioning in the dollar. Risks of an upside surprise can’t be rule out either, especially as economists have structurally underestimated the strength of hiring in the post-pandemic era.


The European Central Bank fulfilled its intermeeting guidance yesterday by cutting rates 25bps to 3.75%, becoming only the fourth G10 central bank to do so this cycle. The history doesn’t stop there, however. This was also the first time that the ECB has started an easing cycle ahead of the Fed and the first rate cut outside of a recession or financial crisis since the conception of the euro. While the decision will be noted in economic history, the market reaction won’t, however. The euro barely flinched on the ECB’s announcement, as both the cut and the adjustment to the central bank’s forecasts largely met expectations. The only slight deviation came from the magnitude of the revision to this year’s growth and core inflation forecasts, which were raised by 0.3pp and 0.2pp respectively. The direction of travel was well-known in advance, however, and set against a higher conditioning path for ECB policy rates, helped validate policymakers’ cautious message that upcoming interest rate decisions will be data dependent. The more hawkish set of economic projections, coupled with the ECB’s decision to cut nonetheless based on their growing confidence that inflation will converge back to target, leads us to believe that the ECB’s easing cycle will progress at a quarterly pace, aligned with fresh staff projections. Markets have adopted a similar view in recent weeks, which has helped the euro rally to current levels.

With a back-to-back cut in July now out of the question, the focus for euro traders turns to US economic developments, where Fed pricing is subject to greater revisions. We continue to believe that for EURUSD to make a run at the 1.10 handle in the coming weeks, US data needs to hit the right temperature to accelerate Fed easing bets without stoking subsequent recession fears. That could begin today should the US payrolls number undershoot expectations at the rumoured rate of 160k, but we suspect that such an outturn will only leave EURUSD in touching distance of the key psychological level. For EURUSD to break above 1.10, next week’s US CPI report, released just hours before the Fed decision, will need to confirm that recent disinflationary progress is becoming a trend, resurrecting the prospect of a July cut from the Fed as a result.


With the focus for traders on events elsewhere, sterling failed to pick up much impetus from domestic developments, most notably the publication of May’s Decision Maker Panel. Year ahead output price expectations failed to ease, despite having been expected to tick down 0.1pp, an outcome that should keep the Bank of England cautious for the time being. But more significantly in our view, expected year-ahead wage growth fell by 0.3 percentage points to 4.5% on a three-month moving-average basis in May, and from 4.6% to 4.1% on a single month basis. This is in keeping with a sharp slowdown in wage growth once the impacts of April’s National Living Wage have been fully transmitted, with this in turn likely to see the BoE cut rates in August, in contrast to current market pricing that current places these odds at just 42%. Even so, the ECB stole the limelight yesterday, with a hawkish cut seeing GBPEUR slide by 0.15pp. Today looks set to bring more of the same as well. News from Halifax that house prices stagnated in May has had minimal impact on sterling in Early trading. Instead, it should be the turn of the US to drive GBP price action, with this afternoon’s US jobs report the major event of note left heading into the weekend.


Friday looks set to be yet another busy day for USDCAD. While the Bank of Canada’s decision to cut rates on Wednesday failed to see the pair stabilise above 1.37, today could see markets take another crack at this level. Both US and Canadian jobs data are set to be published at 13:30 BST, with a very real prospect that the diverging fortunes of both economies will be on full display once again. While US data is expected to show the labour market holding steady in May, Canadian readings are projected to be far more disappointing. Economists expect to see just 22.5k jobs last month in Canada, a sharp step down from the 90.4k recorded in April. Moreover, the unemployment rate is expected to continue its grind higher, rising 0.1pp to 6.2%, while wage growth is forecast to ease, albeit marginally, to 4.7%. If realised this would go a large way to validating the BoC’s decision to cut this week, undermining the one argument currently favouring a degree of caution from the Governing Council, namely that the labour market might be a little stronger than other indicators have suggested, which could in turn signal inflationary stickiness. For now, we have one more rate cut projected for the BoC before the Fed meets in September, and when we expect the FOMC to deliver their first cut of this cycle. That said, a soft set of prints today would align Canadian labour market indicators with the weakness seen across recent GDP and CPI readings, suggesting that a faster pace of policy easing may be needed. If realised and set against robust data out of the US, we expect to see USDACAD trading above 1.37, and likely well on track to hit our month end target of 1.38 on the prospect of significant policy divergence between the BoC and the Fed.



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