Forex Major Currencies Outlook (May 3 – May 7)

USD 

FOMC meeting failed to deliver any news on the tapering of the QE program. The Fed funds rate and QE of $120bn/month were unchanged as was widely expected. The rise in inflation was attributed to transitory factors. Fed Chairman Powell stated that it will take “some time” for substantial progress to be achieved adding that the economy is a “long way” from the Fed’s goals. Inflation expectations will likely move up with a tighter labour market. Overall a dovish message from the Fed that pushed the USD lower. Some positives from the statement include the assessment of impact of the vaccination program combined with fiscal support on the economic recovery. Statements like “indicators of economic activity and employment have strengthened” and “sectors most adversely impacted by the pandemic have improved” also add small positives. 

Preliminary March durable goods improved from February but heavily missed expectations. Headline number came in at 0.5% m/m vs 2.5% m/m as expected while capital goods reading came in at 0.9% m/m vs 1.8% m/m as expected. Shortages in semi-conductor chips were the main culprit for the reading as they had a big influence on the transportation section (-1.7%). Advanced Q1 GDP reading came in at 6.4% annualised. Personal consumption increased 10.7% vs 10.5% as was expected, contributing with more than 100% and giving even more power to the reading. Business investment was also very strong, coming in at 9.9%. Drags on the reading were inventories and net exports. 

On the inflation front, headline PCE came in at 2.3% m/m vs 1.5% m/m in February while core PCE rose 1.8% m/m vs 1.4% m/m the previous month. Core reading returned to the pre-pandemic level of February 2020 indicating mounting inflation pressures. Fed Chairman Powell has reiterated numerous times that they are prepared to look through any overshoot in inflation and will characterize the rise in prices as transitory. As stimulus cheques fully kicked in, personal income came in at 21.1% m/m which in turn pushed personal spending to 4.2% m/m. 

President Biden has unveiled his $1.8 trillion dollar plan that will focus on education and childcare. The entire plan will be financed by raising taxes. The maximum tax rate on capital gains will be 39.6% and it will be applied only to those within top one percent of earners. 

This week we will have ISM PMI data coupled with NFP on Friday. Headline number may be well over a million according to some analysts while the unemployment rate should drop toward the 5.8% level. 

Important news for USD: 

Monday:

• ISM Manufacturing PMI

Wednesday:

• ISM Non-Manufacturing PMI

Friday:

• Nonfarm Payrolls
• Unemployment Rate 

EUR 

German government has raised its GDP forecast for 2021 to 3.5% from 3% in January citing the lifting of restrictions as the positive sign for the economy. They see a “bigger-than-expected” recovery in Q4 and expect the economy to reach pre-pandemic levels in 2022, projecting GDP of 3.6% for the year. 

Preliminary Q1 GDP reading for the Eurozone came in at -0.6% q/q vs -0.8% q/q as expected. Germany reading came in at -1.7% q/q pulling the reading down, although France positively surprised with 0.4% q/q reading. With vaccination program continuing at the current pace and restrictions being lifted across the continent, pieces are in place for a rebound in H2 of 2021. Preliminary April inflation reading saw headline inflation jumping to 1.6% y/y vs 1.3% y/y which is be attributed to the rising energy prices on the back of base effects, while core reading dropped for the fourth straight month and came in at 0.8% y/y vs 0.9% y/y in March. This indicates that sustained price pressures are still missing. 

GBP 

Covid-19 cases have continued to decline, putting the UK on a course to move successfully to the third stage of Prime Minister Johnson’s four-stage reopening plan on May 17. This next phase will see indoor hospitality and professional sporting venues reopen to the public. However, the insensitive statement attributed to the Prime Minister, that he would rather see dead bodies pile up than instigate another lockdown is preventing the pound from rising. 

This week we will have BOE meeting. No changes in policy and rate are expected, however we could see more hawkish stance from the bank pushing the pound up. 

Important news for GBP: 

Thursday:

• BOE Interest Rate Decision 

AUD 

Inflation data for Q1 came short. Headline number came in at 0.6% q/q vs 0.9% q/q as expected and as was in Q4 of 2020 with 1.1% y/y vs 1.4% y/y as expected. Automotive fuel saw the biggest rise in prices (8.7% q/q). Trimmed mean core measure came in at 0.3% q/q vs 0.5% q/q as expected and 1.1% y/y vs 1.2% y/y as expected and as was in Q4 of 2020. RBA targets y/y trimmed core in the 2-3% range and with reading coming in at measly 1.1% we can expect bank to continue their loose monetary policy without indications for tightening in 2021. Official stance is that there will be no rate hikes until 2024. We can also see inflation picking up in Q2 due to the “base effect”, however this will be characterized as transitory by the monetary authorities and overlooked. 

Official PMI numbers for April from China showed readings still in expansion but slowing down from the March. Manufacturing came in at 51.1 with new export orders dropping down to 50.4 indicating waning demand most likely due to Covid-related disruptions, so we may expect this sub index to pick up in May as reopening around the World continues. Services came in at 54.9 and composite was at 53.8. Caixin manufacturing PMI, on the other hand, continued its rise and came in at 51.9 vs 50.6 in March. Output and new orders rose at the fastest pace this year and were coupled with increases in input costs. 

This week we will have RBA meeting from Australia. No changes in policy and rate are expected, progress on employment and assessment of the inflation figures will be watched. China will report Caixin PMI data and trade balance. 

Important news for AUD: 

Tuesday:

• RBA Interest Rate Decision

Friday:

• Caixin Services (China)
• Caixin Composite (China)
• Trade Balance (China) 

NZD 

RBNZ policymaker Peter Harris stated that they are still not reaching employment objectives and that monetary stimulus is still needed. Signs of wage inflation are missing and unemployment remains “relatively high”. NZD may finish as a top performer from G10 currencies in April however May is usually bad month for it so we can see some downward pressure on it in the coming month. 

This week we will have employment data for Q1. 

Important news for NZD: 

Wednesday:

• Employment Change
• Unemployment Rate 

CAD 

BOC Governor Macklem stated that they expect to see a strong growth led by consumption in the H2 of 2021. He added that inflation reading influenced their decision to lower QE to CAD3bn/week. USDCAD was trying to stay below the 1.24 level at the start of the week and then it was pushed down to the 1.23 level on the back of the dovish Fed and stayed below it. Retail sales in February came in at 4.8% m/m vs 4% m/m as expected. Data shows that 9 out of 11 sub-sectors showed an increase in sales and were led by motor vehicles. Clothing and accessories as well as furniture made significant gains compared to January. This is rather old data point since we are already in May, however this was a very strong report and one of the reasons for BOC’s hawkish stance at their last meeting. Advanced estimates of March reading are for a 2.3% m/m rise giving more fire power to already strong Q1. 

This week we will have employment data. 

Important news for CAD: 

Friday:

• Employment Change
• Unemployment Rate 

JPY 

BOJ made no changes to their monetary policy as was widely expected. The rate is still held at -0.10%, targeted yields on 10y JGBs are still around 0% and cap on ETF purchases is at JPY12 trillion. The bank made upgrades to the economic forecasts and now sees GDP in 2021 at 4% vs 3.9% in January. For 2022 GDP even bigger upgrade has been made as it is now seen at 2.4% vs 1.8% in January. On the other hand, inflation expectations are downgraded to 0.1% for core inflation in 2021 vs 0.5% expected in January. BOJ quarterly report shows that pace of the economic recovery will be moderate and that risks are skewed to the downside. They have assessed the financial system as stable which may give JPY some love. However, reimposed states of emergency in three largest prefectures combined with very low vaccine admissions, only 1.4% of the population has received at least one dose, will keep JPY subdued. 

CHF 

SNB total sight deposits for the week ending April 23 came in at CHF701.7bn vs CHF701.5bn the previous week. A rather negligible change as EURCHF is safely hovering over the 1.10 level and is on its way to the 1.11 level. Retail sales in March rebounded tremendously from poor February reading indicating pent-up demand. The reading came in at 22.6% m/m vs -6.6% m/m the previous month.

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