Dollar traders were on edge in the early part of the week as markets braced for the release of the US CPI which subsequently confirmed expectations of a Fed pause.
GBP crosses got an extra dose of volatility during the BoE decision, thanks to the central bank’s shift to a less hawkish stance.
Combined with the return of risk-off flows, this allowed the US dollar to regain gains from its safe-haven appeal at the end of the week.
US dollar pairs
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Although the FOMC refrained from committing to a pause at last week’s meeting, the dollar bulls are nowhere to be found ahead of the April CPI report.
The actual numbers reflected lower-than-expected inflationary pressures, prompting expectations of a rate cut by next year. It didn’t help that the debt ceiling negotiations didn’t bear much fruit, as Friday’s talks were postponed to give more time for staff-level discussions.
Risk sentiment broadly shifted towards risk aversion on Thursday on weaker-than-expected data from China and the US, and instead of a recent turn to hard metals and bonds for safety, traders were directing capital towards the dollar. With fears of a global recession and the rising US debt ceiling, it only makes sense that the cash would be at the end of the week.
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Core monthly CPI came in in line with expectations with an increase of 0.4% for the month of April, faster than the previous rise of 0.1%, while core CPI came in higher than expected at 0.4% mom.
Core producer prices rose 0.2% m/m as expected in April and the previous reading was upgraded to show a flat figure from a previously reported 0.1% decline.
Federal Reserve Governor Michelle Bowman said on Friday that interest rates will likely need to move and stay higher if price pressures do not ease and the labor market remains tight.
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Core CPI fell from 5.0% to 4.9% y/y vs. estimates of 5.0%, marking the smallest 12-month increase since April 2021
Prices of major producers fell with a 0.2% m/m increase in April versus the expected 0.3% increase, dragging the annual rate down from 2.7% to 2.3% – the lowest reading since January 2021.
Initial Jobless Claims came in at 264K against an estimate of 245K and the previous number of 242K, which led to another hike in the unemployment rate over the past two weeks.
Biden signaled some progress in debt-ceiling meetings with congressional leaders early in the week, but talks scheduled for Friday were postponed to allow more time for staff-level discussions.
US Preliminary Consumer Confidence for May: 57.7 (64.0 expected) vs. 63.5 prior – University of Michigan
euro pairs
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The shared currency erased most of its post-European Central Bank gains last week, as traders continued to price in the possibility of future rate hikes stalled or even eased.
Downbeat Euro data this week put more focus on the central bank’s hints that it may slow its tightening in the future, as industrial production data came in below estimates.
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France’s trade deficit narrowed from 9.3 billion euros to 8.0 billion euros, against an estimated deficit of 9.5 billion euros in March.
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German industrial production fell 3.4% m/m in March versus an expected drop of 1.6%, after a previous gain of 2.1%.
Investor Confidence in the Eurozone fell from -8.7 to -13.1 reflecting worsening pessimism against an expected improvement to -7.9.
Italian industrial production fell 0.6% m/m in March versus an expected rise of 0.2%, which led to a previous decline of 0.2%.
Sterling pairs
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Sterling flipped and turned during the BoE decision as the central bank also joined the “cautious rally” bandwagon by easing its forward guidance.
Later in the week, a downbeat monthly GDP reading fueled expectations of a tightening pause and perhaps even the possibility of a rate cut if economic data worsens.
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BRC Retail Sales Monitor rose from 4.9% to 5.2% year-on-year versus an expected decline to 4.7% for April, reflecting increased consumer spending on a same-store sales basis at the retail level.
The Bank of England raised rates by 0.25% as expected, with MPC members maintaining a 7-2 split in voting to increase rates or pause.
The Bank of England’s monetary policy report showed upgrades to inflation expectations from 3.92% in the February announcement to 5.12% for the end of 2023 and from 1.42% to 2.28% for the end of 2024.
Construction production rose 0.2% on a monthly basis instead of the 0.4% decline estimated in March
Industrial production rose 0.7% vs. the expected 0.1% rise in March, the previous reading was upgraded to show a decline of 0.1% from a previously reported decline of 0.2%.
Preliminary business investment figures for the first quarter of 2023 reflect a gain of 0.7% instead of the estimated decline of 0.7%, rebounding from the previous decline of 0.2%.
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The Halifax HPI showed a 0.3% drop in home prices instead of the expected 0.2% rise, the first drop of the year.
Britain’s economy shrank by 0.3% in March rather than post another flat reading of GDP, pushing up the initial quarterly growth figure to a modest expansion of 0.1%.
BoE Governor Bailey stated that “if there is evidence of further (inflationary) pressure continuing, further tightening of monetary policy will be required” and then stated in an interview after press that they were getting close to a point where the central bank could “take the rest in terms of price level
Swiss Franc pairs
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It was a light week in terms of top-level data from Switzerland, which allowed the franc to reap some gains on safe-haven flows and relatively upbeat words from SNB President Jordan.
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SNB President Jordan said in a speech on current challenges to monetary policy at the University of Applied Sciences that inflation is above the range of price stability, higher than what policymakers want.
AUD pairs
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The Australian dollar benefited from early anti-dollar moves and higher gold prices in the first half of the week before returning those gains when risk aversion returned to the markets.
Downbeat inflation and trade data from China is also likely to weigh on copper prices, as well as other commodities, adding to losses for the high-yielding Australian dollar.
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The NAB Business Confidence Index improved slightly from -1 to 0 in April, as the employment component held above its historical average
Retail sales posted another 0.4% m/m increase in March as expected, leading to 5.2% m/y growth.
MI’s inflation forecast accelerated from 4.6% to 5.0%, reflecting stronger estimates of price pressures over the next 12 months.
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Australian Building Approvals fell 0.1% month over month in March instead of rising 3.0% estimated, after a previous rise of 3.9%.
China reported a slowdown in export growth of 8.5% year-on-year in April, down from a previous gain of 14.8%, and a decline in imports of 7.9% versus an expected drop of 0.2%.
CAD pairs
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The Canadian dollar managed to regain some of its early gains in the week, as crude oil prices turned higher and flows became riskier.
However, the gains faded after the US API and EIA Oil Inventories reports surprised traders with gains in inventories, shifting attention to a narrative of weaker oil demand ahead.
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Building permits jumped 11.3% month over month in March versus an expected decline of 2.3%, the previous reading fell from 8.6% to a much smaller 5.6% increase
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The Energy Information Administration’s crude oil inventories surprisingly increased by 3.2 million barrels, versus estimates for a decrease of 2.2 million barrels and a previous decrease of 1.3 million barrels.
NZD Pairs
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Last week’s bullish reaction in the New Zealand dollar to the RBA’s rate hike, improved risk sentiment at the start of the week, and US dollar jitters ahead of CPI helped lift the New Zealand dollar early.
Flows shifted from global risks on Thursday, along with disappointing updates from New Zealand’s manufacturing sector and inflation expectations on Friday.
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BusinessNZ’s manufacturing index rose from 48.1 to 49.1 to reflect a slower pace of contraction in the industry, thanks to higher deliveries and finishing stocks.
The food price index slowed from a previous increase of 0.8% in March to a monthly gain of 0.5% in April, indicating weaker consumer inflation.
Visitor arrivals fell 2.9% month-on-month in March, after a previous increase of 0.6%.
Quarterly inflation expectations slowed from 3.30% to 2.79% in April, pointing to weaker price pressures over the next two years.
Japanese yen pairs
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The yen crosses fluctuated and turned in the first half of the week, spending most of Monday through early Wednesday trading.
But the Japanese currency finally gained some momentum with its rally as risk aversion sentiment picked up during the US session, linked to the highly anticipated US CPI report.
Risk-off sentiment grew further on Thursday thanks to previously mentioned weaker-than-expected economic updates from China and the US, helping the yen post additional gains to post the second best performance heading into the weekend.
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BoJ meeting minutes revealed that policymakers discussed the risks of inflation that exceeded their expectations in March, suggesting room to ease easing efforts.
BoJ Meeting Minutes: Some policy makers saw “positive signs” in terms of inflation falling back into target range
The Economic Watchers’ Sentiment Index improved from 53.3 to 54.6 in April, versus an estimated figure of 54.1.
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Money earnings averaged 0.8% year-on-year in March, below the expected 1.0% increase, marking a full year of decline in real wages.
Household spending fell 1.9% year-on-year in March rather than posting an estimated 0.9% gain and erasing the previous 1.6% increase.
The main indicators fell from 98.0% to 97.5%, less than the expected 97.9%, as economic conditions deteriorated in March