Enrique Diaz Alvarez, Chief Financial Risk Officer, Ebury.
A spate of US labor market report last week came out a touch softer than expected, culminating in the headline payrolls number for June. The data cannot be described as weak, and in fact US yields continued to head higher throughout the week, but FX markets took it as a sign that the recent dollar rally may have been overdone and popular trades were unwound. The winner of the week was the Japanese Yen, rebounding sharply even as emerging market currencies sold off, a sign that the popular trades of the year are running into headwinds and trader positions are being stopped out.
The focus for next week will be whether the recent spike in FX volatility and unwind of popular 2023 trades continues. US June inflation out on Wednesday. Further softening is expected on both the headline and core indices, which may be positive for the battered US bond markets but negative for the US dollar. The May employment and monthly GDP report are due from the UK, but this will otherwise be a quiet week for macroeconomic news.
GBP
The relentless march higher in UK rates, caused by the streak of inflation shocks and the Bank of England’s newfound focus on the problem, continues to support Sterling, which is already the best performing G10 currency year to date. The key for this week will be the May employment report, and in particular the wage growth number. As long as the latter remains above 7%, it will be difficult for the MPC to dismiss the real risk of second round effects. Overall the rate environment seems to us to be conducive to further Pound strength.
EUR
May retail sales and the revision to the flash PMI indices for June came in softer than expected, again, adding to the gloom that has started to gather over the Eurozone’s economy. The Euro was able to shrug it off for now, and we do think that there is still too much pessimism around the Chinese recovery story. Next week is very light in terms of Eurozone data. For better or for worse, there is not a lot of information that will be released between now and the July ECB meeting, so speeches by central bankers will provide the focus for the common currency.
USD
The June payrolls reports was split. The establishment survey suggested a certain weakening in the momentum of job creation, while its establishment counterpart showed (still) lower unemployment and a modest pick up in wages. Nothing there or other recent data contradicts the view that the Federal Reserve will hike rates later in the month, a move priced in with a 90% probability by markets right now. Once again the focus this week is on inflation. Markets are confident that the June report will show a continuation of the moderating trend in the key core subindex. Given the significant sell offs we have seen recently in fixed income markets, a dovish surprise may be more impactful both for those markets and the US dollar.
