Forex Major Currencies Outlook (May 30 – June 3)

USD 

New home sales for the month of April showed a significant drop. They came in at 591k, down from 709k in March. Additionally, March reading was revised lower from 763k as initially reported. Higher interest rates lead to higher mortgage rates which in turn lead to lower demand for houses. Couple that with hose prices that have been skyrocketing during past two years and we have a dangerous cocktail for the housing sector. Construction represents 4% of the total economy and great number of key retail sales components such as building materials and furniture all correlate with housing activity thus we can see construction negatively impacting GDP in the coming quarters. 

Minutes from the latest FOMC meeting showed that all participants were in favour of a 50bp rate hike. Determination of members to move quickly and bring policy rate to neutral as fast as possible was palpable in the minutes as they showed that 50bp rate increases are appropriate at next couple of meetings. Inflation pressures remain skewed to the upside and effects of Ukraine conflict are highly uncertain. The board confirmed their intention to start BSR (Balance Sheet Reduction) on June 1 at the tone of $30bn/month and $60bn/month after three months for Treasuries and $17.5bn/month and $35bn/month after three months for MBS. Atlanta Fed President Bostic hinted at the possible pause in rate hikes in September, depending on the economy. 

PCE inflation for April came in at 6.3% y/y, down from 6.6% y/y in March. Core PCE came in at 4.9% y/y, down from 5.2% the previous month and thus made it second consecutive month of declining inflation. If we see inflation pressures waning it will be a huge boost for the consumer and the economy. It will also lead Fed to reconsider the pace of their rate hikes. The yield on 10y Treasuries started the week at around 2.84% and stayed below that level in the second part of the week. FedWatchTool now sees the probability of a 50bp rate hike at 97.6%. 

This week we will have ISM PMI data as well as NFP data on Friday. Headline number is expected to print around 350k with the unemployment rate sliding to 3.5%. 

Important news for USD: 

Wednesday:

• ISM Manufacturing PMI

Friday:

• Nonfarm Payrolls
• Unemployment Rate
• ISM Non-Manufacturing PMI 

EUR 

ECN President Lagarde stated that the bank is likely in position to exit negative rates by the end of Q3. This is a huge statement that propelled EUR toward the new monthly high against the USD and helped it gain against other currencies. She added that APP should end early in Q3 which would allow for the first rate hike to occur in July. She Noted further that situation is complicated due to supply shocks. They have already brought demand down and if they continue to strengthen it would mean that ECB will slow down the pace of policy normalization. In a later interview she stated that ECB’s approach to policy is “perfectly on time”, not behind the curve. When asked about the level of the EUR she just stated that they are attentive to it. 

Preliminary May PMI data showed declines across the board for the Eurozone. Manufacturing slipped to 54.4, fourth consecutive month of declining data, services was at 56.3, down from 57.7 in April and composite fell to 54.9 vs 55.8 the previous month. The report shows “Although there are signs that inflationary pressures could be peaking, with input cost inflation down for a second successive month and supply constraints starting to be less widely reported, inflationary pressures remain elevated at previously unprecedented levels." ECB should not be deterred from normalizing monetary policy after the reading as numbers are still well into expansion territory. 

This week we will have preliminary CPI data for the month of May. 

Important news for EUR: 

Tuesday:

• CPI 

GBP 

Preliminary PMI data in May painted a very grim picture of the UK economy. Manufacturing has dropped to 54.6 from 55.8 in April, however the real pain is seen in services. They plunged to 51.8 from 58.9 the previous month. Expectations were for a drop to 57.3. Forward looking indicators are showing that the worse is yet to come. Increasing inflationary pressures led to big slowdown in services sector as costs of living take bigger and bigger toll on the consumer. The GBP got smashed after the report with GBPUSD falling 100 pips and GBPJPY dropping 200 pips. However, GBP rebounded after that and continued to advance for the week. The UK government announced a £15bn support package for households. The package will target the lowest income households and should help them fight with a “cost of living” crisis. Additionally, BOE may find it much easier now to continue with the rate hike cycle when government is helping with fiscal support. 

AUD 

RBA Assistant Governor Kent reiterated that the bank will not be re-investing the proceeds from maturing bonds. By letting bonds roll off the bank is essentially doing QT (Quantitative Tightening). He added that RBA’s estimate of neutral rate is somewhere between 2 and 3%. CAPEX data for Q1 disappointed and came in at -0.3% q/q vs big upward revision to Q4 of 2021 of 2.3% q/q. Spending on buildings and structures fell by 1.7% while spending on equipment, plant and machinery grew by 1.2%. 

This week we will have Q1 GDP data from Australia and official PMI data from China. 

Important news for AUD: 

Tuesday:

• Manufacturing PMI (China)
• Services PMI (China)
• Composite PMI (China)

Wednesday:

• GDP 

NZD 

RBNZ has delivered on its promise and raised Official Cash Rate (OCR) by 50bp to 2%. The accompanying statement shows that inflation pressures are prevalent and that RBNZ’s core inflation measure is running above 3%. For the record, they target core inflation in range of 1-3%. The statement shows that “Employment remains above its maximum sustainable level, with labor shortages now the major constraint on production.” The bank remains firmly on the path of rate hikes in order to bring inflation into their targeted range. New projections show OCR at 2.68% in September vs 1.89% previously, 3.88% in June of 2023 and 3.95% in September of 2023. Speaking at the press conference Governor Orr reiterated bank’s determination to control inflation and firmly anchor inflation expectations. He stated that labor shortages present the biggest problem for the economy. Neutral rates should be within 2-3% range so the bank is prepared to raise above the neutral in order to tame inflation. 

CAD 

Retail sales in March came in flat vs 1.4% m/m as expected. They were falling all through the Q1 so we can see a very slow start of Q2 consumption wise. Ex autos category fared much better and came in at 2.4% m/m vs 2.1% m/m in February. Average weekly earnings rose 4.3% y/y, almost doubling from 2.4% y/y in February. It was a 0.9% m/m increase. 

This week we will have Q1 GDP data and BOC meeting that will deliver another 50bp rate hike. Markets will look for the remarks about future rate hikes and economic activity and act based on them. 

Important news for CAD: 

Tuesday:

• GDP

Wednesday:

• BOC Interest Rate Decision 

JPY 

Preliminary PMI data for the month of May showed manufacturing easing to 53.2 from 53.5 in April while services PMI continued to improve after restrictions have been lifted. They came in at 51.7, up from 50.7 the previous month which pushed composite to 51.4 from 51.1 in April. The report showed stronger growth in services output while both readings declined in new export orders. Additionally, both manufacturing and services reported drops in new export orders and stronger inflation pressures. Both have positive outlook for the future, although it is stronger in the manufacturing. 

Headline inflation for Tokyo area in the month of May came in at 2.4% y/y vs 2.5% y/y in April. Ex fresh food was unchanged from April at 1.9% y/y while ex fresh food and energy component ticked up to 0.9% y/y from 0.8% y/y the previous month. Japanese government has kept overall view of the economy unchanged but upgraded its outlook for employment and housing sector. 

CHF 

SNB total sight deposits for the week ending May 20 came in at CHF754.1bn vs CHF753.3bn the previous week. Swissy has gained a lot of strength in the past week due to Chairman Jordan’s comment on inflation so the bank did not want intervene a lot in the markets. 

This week we will have Q1 GDP and inflation data. 

Important news for CHF: 

Tuesday:

• GDP

Thursday:

• CPI

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_{Please note that this analysis should not be used as investing advice as it is only an overview of the economic events influencing the markets. Please remember that our accounts have Market Execution. Please note how Execution works during high impact news and other times of low liquidity.}