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• US retail sales will hit the markets at 12:30 GMT Monday
• Early Easter holiday likely boosted consumer spending
• Another solid dataset could put more wind in the dollar’s sails

US economy outperforms

By most indications, the US economy finished the first quarter on a high note. Incoming data point to a robust labor market, which has helped bolster consumer demand and in the process, reignited inflationary pressures.

The Atlanta Fed estimates real economic growth hit an annualized pace of 2.4% in the first quarter, something reaffirmed by incoming business surveys. Heavy government spending and a surge in population growth amid an influx of immigration appear to be the driving forces behind this economic resilience.

With mounting signs that growth and inflation are not cooling down, traders have continued to unwind bets of Fed rate cuts. Market pricing currently points to less than two cuts for this year, down from six just a few months ago.

This sharp Fed repricing has propelled US yields higher, lending strength to the US dollar.

Retail sales enjoy Easter boost

Turning to the upcoming dataset, retail sales are forecast to have risen by 0.3% on a monthly basis in March, a slowdown from the 0.6% in the previous month but still a solid print overall.

It seems that the early Easter holiday pulled forward some spending into March, giving an artificial boost to retail sales, at the expense of April’s print.

That said, some early indicators on card spending painted a mixed picture. Bank of America data pointed to a soft month for consumption, whereas Visa’s  spending momentum index continued to rise, signaling stronger demand.

Given these conflicting signals, there is some scope for surprises in this dataset. Taking a look at the euro/dollar chart, a stronger-than-expected retail sales print could push the pair even lower, with the next major cluster of support likely to be found near the 1.0515 zone.

On the flipside, a disappointment could help euro/dollar correct higher. A potential move back above the 1.0700 region could open the door for further upside extensions towards the 1.0800 area.

Dollar outlook remains positive

In the big picture, the US economy seems stronger than other major regions at this stage, especially Europe. This economic divergence points to a situation where the European Central Bank might cut interest rates faster and deeper than the Fed does, which in turn could keep downside pressure on euro/dollar.

Still, for the dollar to truly shine, it might also need some assistance from the risk sentiment channel. Given the dollar’s safe haven qualities, a period of risk aversion in the markets could go a long way in helping the reserve currency stage a more fierce rally.

Indeed, with stock market valuations being stretched in an environment where US yields are rising, the risk of a correction in equities seems to be growing.

• CPI numbers due in the UK, Japan, Canada and New Zealand
• China to also come into the spotlight as Q1 GDP eyed
• US retail sales to kickstart the week as earnings season gets underway

CPI figures to headline UK data flurry

After yet another hot CPI report in the United States, inflation data will remain at the forefront of the upcoming week’s releases, including in the United Kingdom. But first up on the UK agenda will be the February employment report on Tuesday.

Employment declined in the three months to January, pushing up the jobless rate to 3.9%. The UK labour market has slowed down substantially over the past year amid a slight contraction in GDP.  The economy appears to be rebounding but jobs growth could remain weak for some time yet. From a wage inflation perspective, a cooling labour market can only be good news.

Growth in average weekly earnings excluding bonuses has moderated from a peak of 8.9% y/y last summer to 6.1% in January. A further deceleration is likely in February – a trend underscored by a Bank of England survey showing that wage growth expectations have fallen to the lowest in two years.

However, softer wage growth won’t be the whole story for sterling next week as investors will also be dissecting the latest CPI readings on Wednesday. UK inflation fell to 3.4% in February and another drop is expected for March to 3.1%. The core figure is also forecast to decline again.

Finally, on Friday, retail sales numbers for March will be watched for clues on whether consumer spending is picking up or not.

Cable is currently testing the floor of the sideways range it’s been trading in since December and the incoming data pose a downside risk should they suggest that the Bank of England is still on track to start cutting rates in August, while the Fed’s timeline has started to shift to September.

If the UK’s inflation outlook continues to improve, the pound might struggle to hold above $1.25 and traders will either want to see Britain’s economy recovering more strongly or US growth losing steam to defend that key level.

Euro to take backseat after ECB

Across the channel, it’s going to be a fairly quiet week for the euro in the aftermath of the ECB decision, with only the final estimate of March CPI and second-tier releases to keep traders busy.

The European Central Bank left interest rates unchanged as expected at its April policy meeting while signalling that a rate cut could be on the cards at its next gathering in June. Inflation in the Eurozone has been much more tamed than in the US this year. Coupled with a weaker economy, the ECB can afford to gradually start loosening its restrictive stance.

The headline rate of the consumer price index eased to 2.4% in March and no revisions are expected in the final estimate due on Wednesday.

Earlier in the week, industrial production numbers might attract some attention on Monday, while the ZEW economic sentiment out of Germany comes out Tuesday.

Barring any surprise upward revisions to the CPI prints, the euro will likely stay on the backfoot against the US dollar over the next few days.

Can Japanese CPI lift the downtrodden yen?

Inflation in Japan edged up sharply in February after a year-long decline. Core CPI that excludes fresh food prices and which the Bank of Japan targets for achieving 2% inflation rose to 2.8% from 2.0%. However, whilst there was probably a further modest uptick in overall CPI, the core figure, out on Friday, is forecast to have eased to 2.6%.

Nevertheless, investors are questioning whether inflationary pressures in Japan can re-accelerate much from hereon and thus, expectations for additional rate hikes remain muted – something that has been weighing heavily on the yen.

Yet, the Bank of Japan seems to be subtly paving the way for a second rate hike towards the end of the year and Governor Ueda has hinted as much. There are also reports that the bank will revise up its inflation forecasts at its next meeting on April 26. Policymakers are hopeful that bumper pay deals in this year’s spring wage negotiations and an end to energy subsidies at the end of May will keep inflation above 2% in the medium-term horizon.

But until this is reflected in the CPI data, the yen is unlikely to find much love.

A mixed picture for China’s economy

China is set to publish GDP estimates on Tuesday as optimism about its economic recovery improves. The world’s second largest economy probably expanded by 1.4% quarter-on-quarter in the three months to March, quickening from a 1% pace in the prior quarter. However, markets might focus more on the annual rate that’s expected to have slowed from 5.2% to 4.6%.

The March figures for industrial output and retail sales could also leave investors unimpressed as both are anticipated to have eased year-on-year compared to February.

Any disappointment from the GDP stats could add to the aussie’s and kiwi’s woes, which have been swimming in choppy waters lately amid the constant swings in Fed rate cut bets. For the Australian dollar, traders will also be keeping an eye on domestic jobs numbers on Thursday, while for the New Zealand dollar, Wednesday’s CPI prints will be crucial.

The Reserve Bank of New Zealand maintained a very neutral stance at its April policy meeting, signalling that a rate cut is some time away. But should CPI rise by less than the expected rate of 4.1% y/y in the first quarter, investors might become more confident about an August cut.

Canadian inflation eyed

Another country reporting CPI data next week is Canada, due Tuesday. A June rate cut is still in play for the Bank of Canada despite heightened caution globally about sticky inflation. Canada’s headline CPI rate eased to 2.8% in February and underlying measures fell too.

A continuation of that trend in March could boost the odds of a rate cut in June, which currently stand at less than 50%, piling more pressure on the Canadian dollar.

The loonie has already shed about 3.5% against the US dollar this year so any further signs of a possible divergence in monetary policy between the Fed and the BoC could increase those losses.

Retail sales only threat for dollar bulls

South of the border, the US schedule is looking relatively light, with Monday’s retail sales numbers being the top release.

The latest NFP and CPI reports both dented expectations of a summer rate cut by the Fed so investors will be hoping for some softer data next, and they could well get that.

Retail sales are forecast to have risen by 0.3% m/m in March, slowing from the prior 0.6% rate.  Other indicators to watch out of the US are the Empire State Manufacturing index, also on Monday, building permits and housing starts along with industrial production on Tuesday, to be followed by the Philly Fed manufacturing index and existing home sales on Thursday.

With markets still reeling from the setback to early rate cut hopes, the dollar will likely hold firm. But shares on Wall Street stand a chance of staging a rebound if the Q1 earnings season gets off to a strong start. The spotlight next week will fall on Netflix, which announces its results on Thursday.

A surprisingly high US inflation print this week triggered the biggest shake-up in US bond markets in more than a year. The US 2-year government bond yield closed 23bp higher on the day, which was the biggest one-day move since March last year. It reflects a further repricing of expectations for Fed policy with money markets now pushing the first cut out to September (priced with 90% probability). The reason was not so much the size of the upward surprise in core CPI which increased 0.36% m/m versus expectations of 0.3%. But it was the third month in a row with an upward surprise and the details showed a renewed worrying upward trend in the 'super-core' inflation of services excluding shelter and health care. The data also triggered a negative response in stock markets, although the decline was overall moderate (S&P500 down 1%). Equities are currently supported by a turn higher in the global manufacturing cycle, but the high inflation data may cap performance in the short term. The USD strengthened significantly on the numbers with EUR/USD moving from 1.087 to 1.07 on Friday, the lowest in two months.

On Thursday, the ECB decided to leave policy rates unchanged as unanimously expected. A rate cut looks set to come in June, subject to further confidence on the three criteria that have guided ECB policy making through the past year. The next to no new policy signals left markets largely unchanged. We continue to like our ECB rate call of a 25bp rate cut call in June, followed by further 25bp rate cuts once per quarter through the end of 2025. We see risks skewed to less than three rate cuts this year, though.

Commodity prices have been on the rise over the past weeks as a gradual recovery in the global manufacturing cycle is lifting demand. This week oil prices moved above USD90 per barrel coming from USD80 at the beginning of the year. The LMEX metal price index has saw a further increase this week and is now up 10% since early March. The upward pressure implies that global goods price inflation has likely passed the bottom and central banks will get no further help from this side.

While US inflation is too high, China is still struggling with too low inflation. Headline CPI fell back to 0.1% y/y in March from 0.7% y/y as a temporary lift in February related to the Chinese New Year holiday dropped out again. The low inflation reflects too weak demand and the government shortly after vowed to provide further consumer stimulus.

Over the coming week focus turns to US retail sales on Monday. The numbers have been softer lately, but decent income growth should keep it supported. US also releases the surveys from Empire and Philadelphia. In the euro area the main indicators due being German ZEW and Euro industrial production. For the UK, we get the labour market report for February/March on Tuesday, where focus will be on developments in wage growth. On Wednesday, inflation for March is released where we expect both headline and core inflation to moderate.  In China we get GDP for Q1 as well as the batch of industrial production, retail sales and housing data for March. Japan releases CPI inflation on Friday, which will be interesting following the change in BoJ policy lately. February inflation spiked to 2.8% on a base effect. Tokyo data indicated that price pressures remain well in line with the 2% target.

Full report in PDF.

Markets

This morning we wrote: “The dollar holds the better cards against both the euro and the pound. EUR/USD is nearing the 1.07 pivot again and GBP/USD holds close to 1.25 this morning. Which will break first?” Well, both, it turned out. A clearer than ever divergent path between the Fed and ECB specifically weighs on the euro. Collins (Boston Fed) picked up on her speech yesterday, adding this time that she only expects two cuts (instead of the three she probably forecasted in the March dot plot). ECB governor Stournaras this morning explicitly made the case for Frankfurt to go solo slim. He sees risks that inflation may undershoot the 2% target while the current monetary policy stance could undermine the economic recovery. A few more sessions like today’s and the former could be the least of Stournaras’ worries. EUR/USD tanked from 1.073 to 1.064, piercing through the 1.0695 support (previous 2024 low). Apart from 1.0611 (76.4% retracement on the 2023Q4 rally), the road to the 2023 low of 1.0448 is free of any obstacle. Cable (GBP/USD) succumbed to gravity. It lost the 1.25 mark with a technical acceleration lower kicking in afterwards. Filling offers around 1.2456, the pair hit a new 2024 low-point and risks losing the 50% retracement (of the October-March ascent) support area as well. The likes of BoE’s Greene over the past few days joined her hawkish colleagues Mann and Haskel in pushing back against the market’s too optimistic rate cut bets. It didn’t help against the almighty USD but EUR/GBP did slip to the lowest level in a month before paring some of the losses again. Speaking of king dollar, DXY is attacking the 106 big figure, the highest level since mid-November. JPY is the only G10 currency outperforming the dollar (USD/JPY 152.83). A steep decline in core bond yields comes an ailing yen to the rescue.

Core bonds indeed rally today. German Bunds outperform peers, probably finding support in Stournaras’ comments as well. Yields drop between 11.3 and 13.4 bps with the belly of the curve outperforming the wings. Treasury yields return some of the sharp gains earlier this week, shedding 7.8 to 9.2 bps in a curve shift similar to Germany. As things stand, the 10y yield won’t close the week above the 4.54% resistance. UK gilt yields drop more or less the same as their US counterparts. Reports of Israel preparing for a potential direct attack from Iran triggered increased core bond buying with investors seeking safety ahead of what could be an explosive weekend. The possible geopolitical escalation left stamps on other markets as well. Stocks temporarily switched from gains to losses in Europe. The EuroStoxx50 still manages to eke out a 0.2% gain. Wall Street opens up to 0.8% lower. Oil prices jumped to $91.7/b and is on track for the highest close since mid-October.

News & Views

Swedish inflation slowed to 0.1% M/M in March, both for the headline figure and for the gauge using a fixed interest rate (CPIF; Riksbank’s preferred gauge). CPIF excluding energy even stabilized on a monthly basis whereas consensus feared an acceleration for different inflation measures to 0.3% or 0.4% M/M. As a result, Y/Y-figures slowed more than forecast on a top level (4.1% Y/Y from 4.5%), using the fixed rate (2.2% Y/Y from 2.5%) and excluding energy (2.9% Y/Y from 3.5%). The monthly change in March was due to increased prices of electricity (+1.8%), (+2.6%) and transport services (+2.7%) while simultaneously, food prices fell (-0.8%). Furthermore, there were price decreases in recreation and culture (-1.3%), partly due to the yearly book sale. Today’s data strengthen the idea that the Swedish Riksbank can cut its policy rate for a first time already at its next, May, meeting. SEK swap rates drop around 15 bps across the curve today, outperforming the global market move. EUR/SEK is testing the YTD high at 11.60 in spite of genuine euro weakness.

Vietnam’s largest shipper of coffee, Intimex Group, expects coffee exports in 2023-24 to be lower than last year at 1.5mn tons. The nation has enough beans to cover exports for the rest of the season, but some farmers may continue limiting sales as they hold out for higher prices. Prices for Robusta coffee climbed to a fresh record with the arabica version advancing to the highest level since September 2022. Apart from restrained supply, the coffee markets is also rumoured to be supported from hedge funds switching from the cocoa market to the coffee one.

Cable fell to the lowest in nearly five months on Friday, following fresh bearish acceleration through psychological 1.2500 support and Fibo level at 1.2465 (50% retracement of 1.2037/1.2893 uptrend.

Breach of a multi-month range floor (1.2518) weakens the structure and increases risk of deeper fall on completion of a double-top pattern on weekly chart.

Bearish daily studies (14-d momentum remains in negative territory / MA’s in bearish setup and formation of 5/200DMA death cross) contribute to negative outlook.

Weekly close below 1.2500 zone is minimum requirement to keep fresh bears in play and to confirm bearish signal for extension towards next target at 1.2364 (Fibo 61.8%).

Corrective upticks should be capped under broken Fibo 38.2% level (1.2566) to offer better selling opportunities.

Caution on firm break above 200DMA (1..2583).

Res: 1.2518; 1.2539; 1.2565; 1.2583.
Sup: 1.2400; 1.2364; 1.2288; 1.2239.

The New Zealand dollar is down sharply on Friday. In the North American session, NZD/USD is trading at 0.5956, down 0.68%. The US dollar has moved higher against the majors and NZD/USD has declined about 1% this week.

NZ manufacturing PMI contracts for 13th straight month

Manufacturing has been an Achilles heel for many of the developed economies and New Zealand’s manufacturers have been hit hard. The Business NZ manufacturing PMI dropped to 47.1 in March, down from 49.3 in February. This was the lowest point this year and marked a 13th consecutive month of contraction, the longest downturn since 2009.

The prolonged slump in manufacturing shows no signs of turning the corner anytime soon. China’s slowdown has been a key factor in the downturn, as it is New Zealand’s number one export market. China is grappling with inflation and this week Fitch ratings lowered its credit outlook on China to negative, although the country’s credit rating was not affected.

New Zealand’s economy slipped into a shallow recession in the second half of 2023 but the markets remain confident that the Reserve Bank of New Zealand will lower rates this year. Investors have priced in an initial rate cut in August, while the RBNZ has projected a first rate cut in 2025. The RBNZ held rates for a sixth straight time this week and is reluctant to consider a rate cut until it is confident that inflation will remain sustainable within its 1-3% target.

The US economy continues to shine and the March nonfarm payrolls and CPI releases were stronger than expected. The Fed is concerned as inflation, which has climbed to 3.5%, has accelerated for two straight months. The hot inflation report prompted hawkish reactions this week from New York Fed President Williams and Boston Fed President Collins, who said the was no need to lower lower rates until it was evident that inflation was moving back to the 2% target. The markets have pared expectations for rate cuts as the Fed will likely delay plans to trim rates due to the strong labor market and rise in inflation.

NZD/USD Technical

• NZD/USD is putting pressure on support at 0.5953, which has held since April 3. The next support level is 0.5853
• There is resistance at 0.6000 and 0.6060

Daily Pivots: (S1) 152.92; (P) 153.12; (R1) 153.48; More...

Intraday bias in USD/JPY is turned neutral first with 4H MACD crossed below signal line. Some consolidations could be seen first. But further rally is expected as long as 150.80 support holds. Break of 153.37 will resume larger up trend to 155.20 fibonacci projection level next.

In the bigger picture, correction from 151.87 (2023) high could have completed at 140.25 already. Rise from 127.20 (2023 low), as part of the long term up trend, is probably ready to resume. Decisive break of 151.93 resistance (2022 high) will confirm this bullish case. Next medium term target will be 61.8% projection of 127.20 to 151.89 from 140.25 at 155.20. This will remain the favored case as long as 146.47 support holds, in case of another pullback.

Daily Pivots: (S1) 0.9068; (P) 0.9107; (R1) 0.9140; More....

Intraday bias in USD/CHF remains neutral for the moment, as consolidation from 0.9146 continues. Further rally is expected as long as 0.8996 support holds. Break of 0.9146 will resume whole rally from 0.8332. Next target is 161.8% projection of 0.8550 to 0.8884 from 0.8728 at 0.8818.

In the bigger picture, price actions from 0.8332 medium term bottom as tentatively seen as developing into a corrective pattern to the down trend from 1.0146 (2022 high). Further rise would be seen as long as 0.8728 support holds. But upside should be limited by 0.9243 resistance, at least on first attempt.

Daily Pivots: (S1) 1.2516; (P) 1.2548; (R1) 1.2584; More...

GBP/USD's fall continues to as low as 1.2452 so far. Intraday bias stays on the downside for 100% projection of 1.2892 to 1.2538 from 1.2708 at 1.2354 next. On the upside, above 1.2538 support turned resistance will turn intraday bias neutral and bring consolidations, because staging another decline.

In the bigger picture, price actions from 1.3141 medium term top are seen as a corrective pattern to up trend from 1.0351 (2022 low). Fall from 1.2892 is seen as the third leg. Deeper decline would be seen to 1.2036 support and possibly below. But strong support should emerge from 61.8% retracement of 1.0351 to 1.2452 at 1.1417 to complete the correction.

Daily Pivots: (S1) 1.0697; (P) 1.0727; (R1) 1.0755; More...

EUR/USD's decline extends through 1.0694 support today. The development confirms resumption of whole fall from 1.1138. Intraday bias stays on the downside for 100% projection of 1.1138 to 1.0694 from 1.0980 at 1.0536 next. On the upside, above 1.0723 support turned resistance will turn intraday bias neutral and bring consolidations first, before staging another fall.

In the bigger picture, price actions from 1.1274 are viewed as a corrective pattern to rise from 0.9534 (2022 low). Current fall from 1.1138 is seen as the third leg. While deeper decline is would be seen to 1.0447 and possibly below. Strong support should emerge from 61.8% retracement of 0.9534 to 1.1274 at 1.0199 to complete the correction.