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EUR/GBP edged higher to 0.8643 last week but reversed after rejection by medium term trendline resistance. Initial bias stays on the downside this week for retesting 0.8491/7 support zone. On the upside, above 0.8582 minor resistance will turn intraday bias neutral first.

In the bigger picture, outlook remains bearish as EUR/GBP is capped below medium term falling trendline. That is, down trend from 0.9267 (2022 high) is still in progress. Firm break of 0.8491/7 will target 100% projection of 0.8764 to 0.8497 from 0.8643 at 0.8376.

In the long term picture, price action from 0.9499 (2020 high) is seen as part of the long term range pattern from 0.9799 (2008 high). Range trading should continue between 0.8201 and 0.9499, until there is clear signal of imminent breakout.

EUR/AUD's fall from 1.6742 resumed by breaking through 1.6368 support last week. The development revived the case that rise from 1.6127 has completed at 1.6742. Fall from there is the third leg of the corrective pattern from 1.7062. Initial bias is now on the downside this week for 1.6127 support next. On the upside, above 1.6484 resistance will turn intraday bias neutral and bring consolidations.

In the bigger picture, fall from 1.7062 medium term top is seen as a correction to the up trend from 1.4281 (2022 low). In case of another fall, strong support is expected around 1.5846 and 38.2% retracement of 1.4281 to 1.7062 at 1.6000 to bring rebound. Break of 1.7062 is in favor as a later stage.

In the longer term picture, price actions from 1.9799 (2020 high) are seen as a long term decline at the same scale as the rise from 1.1602 (2012 low). Rebound from 1.4281 is seen as the second leg. As long as 55 M EMA (now at 1.5950) holds, this second leg could still extend higher. However, sustained trading below 55 M EMA will open up the bearish case for extending the decline through 1.4281 low.

EUR/CHF rebounded further to 0.9797 last week but retreated since then. Initial bias is turned neutral this week for consolidations. But further rally is expected as long as 0.9708 minor support holds. Break of 0.9797 will target a retest on 0.9847 high. However, break of 0.9708 will turn bias to the downside, to extend the corrective pattern form 0.9847 with another falling leg.

In the bigger picture, while 55 D EMA (now at 0.9644) was breached, EUR/CHF rebounded strongly since then. Rise from 0.9252 medium term bottom should still be in progress. Break of 0.9847 will target 38.2% retracement of 1.2004 (2018 high) to 0.9252 (2023 low) at 1.0303, even as a correction to the down trend from 1.2004. However, sustained trading below 55 D EMA will argue that the rebound has completed.

In the long term picture, fall from 1.2004 (2018 high) is part of the multi-decade down trend. Firm break of 1.0095 resistance is needed to be the first sign of long term bottoming. Otherwise, outlook will remain bearish.

Monday, Apr 29, 2024

Tuesday, Apr 30, 2024

Wednesday, May 1, 2024

Thursday, May 2, 2024

Friday, May 3, 2024

U.S. Highlights

• There was no reprieve in U.S. data this week for those concerned the economy is running too hot for the Federal Reserve to deliver imminent interest rate relief. Expectations for multiple rate cuts have been greatly pared back since the start of the year and this week’s data will only reinforce that.
• This week’s release of U.S. Q1-GDP shows that U.S. consumers still exhibit resilience to higher interest rates.
• Similarly, PCE inflation delivered two hawkish surprises: goods inflation eased less than expected and services inflation continued to trend up, for an overall uptick in the recent trend in prices.

Canadian Highlights

• Retail spending was subdued in February, although overall consumption was strong in the first quarter. Solid consumption underpinned what was likely robust Q1 growth for GDP.
• However, we see economic growth easing in Q2 as consumer spending softens amid elevated borrowing costs and a rapidly cooling job market.
• The Bank of Canada’s Summary of Deliberations revealed a more dovish lean by policymakers, although “sustained” evidence of cooling inflation is required before pulling the trigger on cuts.

U.S. – Consumer Still Resilient

The big question for the U.S. economy is when inflation will subside or the economy will slow under the pressure of higher interest rates, especially on the side of consumer spending. Either development could be sufficient to bring forward expectations for Federal Reserve interest rate cuts, but this week both GDP and inflation remained stubbornly robust.

The advance estimate of real GDP for Q1-2024 came in at a seemingly sub-par 1.6% (q/q annualized), below the consensus forecast of 2.5%. This is a slowdown from the large expansion of 3.4% we saw in the previous quarter, but the softness in this quarter’s reading looks temporary, while the strength has momentum. The biggest drags on growth were imports and an inventory drawdown, which are more volatile in the quarterly data, and could be reversed in next quarter’s data (Chart 1). More to the point, they speak less to how consumers and U.S. businesses are reacting to high interest rates, the chief concern for the Federal Reserve when it asks whether its policy is cooling the economy. Consumer spending softened only a little, and growth generally continues to be supported by solid domestic demand. This is not yet an economy that looks overly burdened by high interest rates.

The latest inflation data has the same signals as the activity data. In the first quarter, core PCE inflation rose sharply from the average rate of inflation we saw in the second half of 2023. On a year-over-year basis, headline PCE inflation increased in March from February, maintaining roughly the same monthly increase as from February to January – that is, it looks like inflation has momentum in the first quarter. The March data showed an increase in both goods and services prices, whereas in previous months we had seen some declines in goods prices (Chart 2). Core PCE inflation, the Federal Reserve’s preferred metric, was essentially flat from February to March.

This morning’s personal income data also confirmed that the consumer is still resilient. Personal consumption increased in March, and increases were registered across goods and services, showing strong demand from households. And personal savings declined in absolute terms and as a share of disposable income, despite a strong increase in income – suggesting that consumers are not motivated to build up precautionary savings. Our tracking for Q2 would now point to consumer spending to increase 3.5% given the favourable increase in goods spending in March and continued momentum in services. That is a notable upgrade from the 1.9% we forecast in March.

Those hoping for the data to support interest rate cuts earlier rather than later would have been looking for a slowdown in consumer spending, inflation, or both, but this week we received the opposite. This complicates things for the Federal Reserve, which needs to ensure inflation keeps decelerating towards the 2% target. Given this week’s economic data, market pricing is solidifying around a delayed start to rate cuts.

Canada – Rate Cuts on the Horizon

Themes that have recently characterized Canadian financial markets generally held true again this week. The Canadian dollar was broadly unchanged, hanging at a low level of 73 U.S. cents which will do no favours for inflation. Meanwhile, the 10-year Canada yield moved somewhat higher (as of writing), as U.S. rate cut expectations continue to be pared back. Meanwhile, the WTI oil benchmark climbed by about $2, reflecting an unanticipated drawdown in inventories.

It was a quiet week for economic data releases, headlined by a consumer pulse check coming through retail sales. Spending was modest in February, with retail volumes, or sales adjusted for inflation, dipping 0.3% m/m (month-on-month). However, it didn’t change the narrative that the first quarter was a solid one for Canadian consumption, thanks in large part to a huge gain in the country’s population. Note that February’s data represented a partial retracement after two months of very strong gains (Chart 1). What’s more, our internal credit and debit card spending data (which captures both goods and services spending) suggests that a firm increase took place in March.

The February retail data will have some negative influence on next week’s February GDP report. However, if Statcan’s advance GDP estimate is to be believed, growth was healthy at 0.4% m/m. Even if there was no gain in March, industry-based GDP growth is tracking a robust 3.5% annualized pace in the first quarter (this is distinct from the national accounts GDP measure in our forecast). The question now becomes whether this momentum will last. In our view, the answer is no, as we expect economic growth to cool to a sub-trend pace starting in the second quarter (Chart 2). Underpinning our forecast is an anticipated slowdown in consumer spending, weighed down by elevated interest rates and a job market that is rapidly cooling.

The Bank of Canada’s latest Monetary Policy Report revealed a noteworthy upgrade to the Bank’s economic growth projections. Still, policymakers chose to hold the line on rates earlier in the month. This week featured the release of the Bank’s Summary of Deliberations, which more fully fleshed out the reasoning behind this decision. The summary struck a more dovish tone than in prior deliberations given recent favourable inflation readings.

That said, there was a desire by policymakers for this improvement to be “sustained” before rates could be cut, although what constitutes “sustained” was not defined. Some Governing Council members emphasized that domestic demand and solid U.S. growth could keep inflation from slowing further. Still, others focused on the progress made in bringing inflation down. All told, the minutes reinforced the view that easing will likely be coming in short order, with June/July still looking like a safe bet for the first move. We’ll hear more from Governor Macklem next week when he appears before the Senate banking committee on May 1st.

Summary

United States: The Long and Winding Road to Easing

• The case for rate cuts this summer continued to weaken as this week’s economic data painted a scene of stubborn inflation against the backdrop of defiant consumer demand. We got our first look at Q1 GDP, which downshifted to a 1.6% annualized pace and was accompanied by a hot core PCE deflator reading. Consumers remain unfazed by high rates and inflation as Q1 personal consumption expenditures and March personal spending both came in strong.
• Next week: ISM Manufacturing (Wed.), FOMC Meeting (Wed.), Employment (Fri.)

International: Sentiment Data Suggest European Economic Growth Could Turn a New Leaf

• This week's April PMI data for the Eurozone and United Kingdom reinforced the apparent divergences between sluggish manufacturing and robust service sector activity. However, the data remain generally encouraging and align with our view for modest growth recoveries for both economies this year. The Bank of Japan held monetary policy steady this week, and while a near-term move seems unlikely, some further policy normalization still looks possible by late this year.
• Next week: China PMIs (Tue.), Eurozone GDP & CPI (Tue.)

Interest Rate Watch: Treasury Refunding Preview: Taking a Breather

• The U.S. Treasury has been ramping up its debt issuance over the past year, but we suspect the May 1 refunding announcement will signal the torrid pace is set for a breather. Treasury seems well-positioned to meet its financing need for at least the remainder of the year.

Topic of the Week: Regional Economic Conditions Waving the Beige Flag

• Last week, the Federal Reserve released the April edition of the Beige Book. The release highlights that, although economic activity and the labor market have been plodding along, price pressures remain persistent and the last mile on inflation is proving to be particularly challenging for the Fed.

Full report here.

On Tuesday, we expect Canadian gross domestic product in February to show a more subdued 0.1% increase than the 0.6% jump in January and below the 0.4% advance estimate released a month ago.

The surge in January output was in part tied to transitory factors that will not happen again. Half of the increase came from a rebound in the education sector following the end of large public sector strikes in Quebec. Early data is pointing to a large increase in oil production in Alberta in February, but a weather-related lift in utility output in January is expected to partially reverse. Manufacturing sale volumes edged up just 0.1% in February. Retail sale volumes declined by 0.3% and home resales pulled back 2.6%.

We expect the early flash growth estimate for March to also look soft. Our RBC Consumer Spending Tracker suggests real retail sales declined in March alongside a rise in the unemployment rate and tick lower in hours worked. Fading economic growth momentum late in the quarter, particularly when measured against further rapid population growth, should add to evidence that the underperformance of the Canadian economy relative to other regions is continuing. It’s consistent with our assumption that the Bank of Canada will shift to interest rate cuts before mid-year.

U.S. Federal Reserve policymakers are seeing a very different economic backdrop ahead of next Wednesday’s interest rate decision. U.S. consumers continue to boost spending despite higher interest rates and inflation pressures have shown concerning signs of reaccelerating. The Fed is widely expected to hold the federal funds rate unchanged next week. The language in the policy statement is likely to flag fewer interest rate cuts this year than the 75 basis points worth of declines expected by the policymakers in March. U.S. weekly jobless claims are holding at low levels, suggesting that labour market data on Friday will continue to look firm and reinforce that there is less urgency for the Fed to start pushing interest rates lower than there is for the Bank of Canada.

Week ahead data watch

March Canadian trade data will likely show a widening trade surplus, up by $1 billon from February. Higher oil prices will boost the energy trade balance. Imports are expected to decline 1.4% on lower motor vehicle shipments and railway carloadings with exports remaining little changed from February.

The U.S. goods trade deficit widened by US$1.5 billion in March in the advance U.S. international trade report. Exports and imports of goods slipped during the month by US$6.1 billion and US$4.6 billion, respectively. We think the overall trade deficit stood at US$68.8 billion.

We expect April U.S. jobs numbers will remain strong with a 267,000 jump in payroll employment, adding to the 303,000 jump in the previous month. We look for the unemployment rate to hold steady at 3.8%.

• Important Chinese PMI surveys on Tuesday, ahead of the Fed meeting
• Improvement across the board could be on the cards after positive GDP print
• Aussie could benefit against the US dollar
• Data to be released on Tuesday at 01.30 and 01.45 GMT respectively

A Fed-dominated week

The market’s focus next week will be firmly on Wednesday’s Fed meeting. Its outcome and the overall rhetoric could dictate market sentiment for the next month.

On Tuesday, the April Chinese PMI surveys will be released. The market reacted positively to the recent upside GDP surprise for the first quarter of 2024. However, the positive headline figure masked the mixed underlying details. The pickup in growth was almost entirely driven by a decent increase in industrial production.

There is continued weakness in the consumer side of the economy. This is the key difference between most economies and the US where consumers, despite the surge in lending and credit card rates, continue to vigorously spend. Retail sales in China remain very weak, a situation mostly attributed to the ailing housing sector.

Government measures have not had significant impact yet

Despite several measures put in place to support this sector, house prices remain under pressure. The March 2024 figure showed an annual drop of 2.2% - the highest one since August 2015. As a result, new home sales are going down the drain as both the expectations for lower future house prices and shrinking disposable incomes are forcing buyers to sit on the sidelines for now.

As a result, there are increasing calls for more action from the PBoC. In February, it managed to surprise the market with its largest ever cut to the 5-year Loan Prime Rate (LPR). This is the benchmark rate for mortgages in China and it could be the only way out from the current housing crisis. However, there is a big obstacle: China’s unwillingness to weaken the yuan.

However, this obstacle could be removed if central banks across the globe start to ease their monetary policy stance. Barring a surprise, the ECB will most likely announce a rate cut in June with market participants anxiously waiting for a similar signal from the Fed, despite the stickiness seen in inflation since the start of 2024.

Manufacturing PMIs could maintain the current positive momentum

Moving back to the Chinese PMIs and both the national and private manufacturing surveys will be published on Tuesday. The former tends to focus on the large state-owned firms, while the latter tends to cover more private and export-oriented corporates. Both are hovering around the 50 threshold, but some positive momentum appears to be building up lately.

The vibe is different in the national PMI services survey. Following a trough in late 2023, there is an upwards trend in place with the March 2024 print being the strongest once since June 2023.

Another encouraging set of figures on Tuesday is unlikely to change the overall sentiment about China’s growth outlook but it would definitely allow the market to feel more confident. A few big investment houses have already upgraded their 2024 growth forecasts and more revisions could be on the way if data remains positive during May.

Aussie could get another boost on Tuesday

Following the recent stronger Australian inflation report for the first quarter of 2024, the market is pricing in a small probability of a rate hike during 2024. This looks like an exaggerated reaction but a plethora of positive Chinese data prints, and possibly another PBoC rate cut down the line, could really create the conditions of a growth acceleration in the Southern Hemisphere.

The aussie/dollar pair has recorded six consecutive green sessions, quickly climbing to the 0.6520 area. If Tuesday’s data proves positive, the 100-day simple moving average (SMA) at 0.6581 is next in line to be tested. On the other hand, weak Chinese data could cast a shadow on the current aussie strength and hence could cause a small correction towards the 0.6458 level.

• Investors scale back Fed rate cut bets as inflation stays hot
• But economic growth slows more than expected in Q1
• Will the Fed continue to signal patience?
• The Committee decides on Wednesday at 18:00 GMT

Stubborn inflation weighs on rate cut bets

When they last met, Fed officials left interest rates untouched as it was widely expected, and although they revised up their growth and inflation projections, they continued pointing to three quarter-point rate cuts by the end of the year, which served as a disappointment to those expecting less due to stickier than expected inflation.

Back then, the probability of a first reduction in June rose to around 80% and the total number of basis points worth of reductions by the end of the year was 83. Nonetheless, inflation accelerated further in March and the labor market further tightened, prompting Fed officials to signal that there is no urgency to start loosening, and investors to reevaluate their rate cut bets. This massive repricing supercharged the US dollar, which gained against all its major counterparts and managed to break several key technical levels.

But economy grows by less than expected

Nonetheless, the upbeat momentum in dollar buying did not last for long. The miss in the preliminary S&P Global PMIs for April and the weak first estimate of GDP for Q1 suggest that the world’s largest economy is not faring as greatly as it was previously thought, resulting in some profit taking in dollar long positions.

But the GDP report was not all bad after all. It came with mixed messages. Despite the US economy growing at its slowest pace in nearly two years, domestic demand remained strong, evident by the strong acceleration in PCE prices during the quarter. This confirmed the notion that inflation is much hotter than the Fed would hope and allowed investors to further reduce the amount of basis points worth of rate cuts expected by December, even as they continued selling the dollar. They are now seeing interest rates only 35bps below current levels.

Still higher for longer?

Next week’s Fed meeting will be one of the smaller ones that are not accompanied by new economic projections nor an updated dot plot. Thus, all the attention will fall on the statement and the press conference by Fed Chair Powell for clues on whether rate cuts are still warranted this year, and if so, how many.

If officials hint that interest rates should stay at current levels to ensure that inflation will return to their 2% objective, Treasury yields may continue to rise, and the dollar could stage a comeback as market participants further lift their implied rate path. However, anything leaving the door open to more than one rate reduction to avoid a deeper economic slowdown could come as a disappointment and thereby dollar traders may liquidate more of their long positions.

Euro/dollar returns within a range

From a technical standpoint, euro/dollar has been in a recovery mode lately, managing to poke its nose back above 1.0725, the level that acted as the lower bound of the sideways range that contained most of the price action between mid-November and April 11.

The recovery may continue for a while longer within the range, but a hawkish Fed may encourage the sellers to take charge from below the 1.0800 zone, near the 50- and 200-day exponential moving averages (EMAs) and push the pair back down to the 1.0725 zone. A break lower could carry more bearish implications, perhaps paving the way towards the 1.0610 zone that provided support between April 16 and 19.

Alternatively, a dovish Fed may drive euro/dollar above the EMAs and initially aim for the 1.0875 area. However, the pair would still be within the aforementioned range and thus, the broader outlook would still be neutral. For the picture to be considered bullish, a break above 1.0940 may be needed.

• Fed meets on Wednesday as US inflation stays elevated
• Will Friday’s jobs report bring relief or more angst for the markets?
• Eurozone flash GDP and CPI numbers in focus for the euro
• Chinese PMIs and New Zealand employment to be watched too

Will the Fed put rate cut hopes in more peril?

The upcoming week looks sure to be an action-packed one for the US dollar, as besides an FOMC meeting and the April jobs report, there’s a flurry of other data on the US agenda that will give traders little time to rest.

The main focal point during the first half of the week will be the Federal Reserve’s policy decision on Wednesday. It wasn’t that long ago that the May meeting was seen as the one where policymakers would set in stone the path to a June rate cut. However, following the string of hotter-than-expected inflation and employment data, the timing has moved further out into the future, with a cut seen unlikely before September.

With no updated FOMC projections to accompany the May decision, investors will be hanging on every word to come out of Chair Powell in his press briefing for any clues as to how soon the Fed will begin easing policy.  Those clinging on to hopes that a summer rate cut is still possible will probably be disappointed.

The most recent commentary from Fed officials suggests committee members are more than comfortable staying on pause for a while longer, although the majority continue to foresee some amount of easing later in the year. Powell will likely reiterate the need for patience but still hint that rate cuts remain on the cards.

What investors will be trying to gauge, however, is how confident Powell is on inflation coming down substantially over the coming months that would allow policymakers to loosen their restrictive stance. If Powell strikes a somewhat more hawkish tone than his usual more balanced approach, the US dollar could resume its uptrend.

A labour market that won’t cool

In the event there’s an absence of any fresh signals from the Fed, investors will turn their attention to Friday’s nonfarm payrolls report. Far from slowing, the US economy added an astonishing 303k jobs in March. Analysts expect a figure closer to 210k in April, while the jobless rate is forecast to have stayed at 3.8%.

The crucial factor here is whether wage increases will remain moderate and continue growing at slightly more than 4.0%. Any acceleration in average hourly earnings could spark a bigger panic about fading rate cut bets than an upside surprise in the headline payrolls print.

Also on investors’ radar next week are the ISM manufacturing and non-manufacturing PMIs for April, due on Wednesday and Friday, respectively. Following the softer-than-expected services PMI by S&P Global, a similarly weak ISM services PMI could offset the effects from potentially stronger jobs data and a hawkish tilt by the Fed.

In other releases, quarterly employment costs will be watched on Tuesday along with the Chicago PMI and the consumer confidence index. On Wednesday, there will be more labour market indicators consisting of the JOLTS job openings and ADP employment survey.

Euro sets sights on GDP and CPI update as June cut nears

Barring surprisingly strong wage figures awaited by the ECB at the end of May, a June rate cut seems to be a done deal. What is less certain is the rate path thereafter. Market pricing for the year end has fallen below 75 basis points (~3 rate cuts) in recent weeks and Germany’s influential Bundesbank head Joachim Nagel has warned that a June cut does not necessarily have to be followed by a series of further reductions.

Preliminary readings on first quarter GDP and April CPI due on Tuesday will likely further shape expectations about the rest of 2024, though the probability for June is unlikely to budge much unless there’s a big deviation from the forecasts.

The euro area economy likely expanded by 0.2% quarter-on-quarter in the first three months of the year after flat growth in Q4. An improving economic outlook would lessen the urgency for the European Central Bank to cut rates aggressively so policymakers would have to see further declines in inflation to maintain a dovish stance. Headline inflation is projected to have stayed unchanged at 2.4% in March.

The euro is currently trying to establish a foothold above the $1.07 handle; whether it succeeds will depend on which way the incoming data turns.

Chinese PMIs and New Zealand jobs on the way

Another region enjoying a bounce back in economic activity is China. The official composite PMI climbed to the highest since May 2023 in March, although much of it was driven by the services sector and the recovery in manufacturing remains tepid.

The latest PMI readings from both the government and Caixin/S&P Global are out on Tuesday.

If the economy gathers further momentum in April, that would bode well for risk-sensitive assets like stocks and oil, and commodity-linked currencies such as the Australian and New Zealand dollars.

In New Zealand, the local dollar will also be keeping an eye on domestic employment numbers scheduled for Wednesday. First quarter data on jobs growth, the unemployment rate and wages might offer clues as to how soon the RBNZ is likely to cut rates after the central bank recently gave its strongest indication yet that the next move will be down.

The kiwi could come under pressure if the labour market appears to be slowing.

Elsewhere, Canada publishes monthly GDP estimates on Tuesday and preliminary industrial production numbers for March are due out of Japan on the same day.  Switzerland will release April CPI figures on Thursday and on Friday, Norway’s central bank announces its decision on interest rates.