The mood music coming from the European Central Bank (ECB) sounds fairly dovish, with some even speculating over 50bp of rate cuts. Concerns over inflation seem to have largely evaporated, and tomorrow’s release of the ECB survey on one and three-year inflation expectations may help. Consensus expects both of these numbers to drop.
The ECB may also be worried about the strong euro, where the nominal trade-weighted is at record highs and is up 4% year-on-year. With the Rest of the World fighting over a smaller share of the global demand pie, currency strength is not what a big exporter wants right now.
This week also sees eurozone first quarter GDP data (expected at 0.2% QoQ) and the flash release of April CPI data on Friday, where core could inconveniently pick up to 2.5% YoY.
As for EUR/USD, the euro does stand to be a major beneficiary from the flight from dollars, but there is still little evidence of foreign reserve managers leaving US Treasuries. And actually, the US 10-year swap spread (a measure of US sovereign credit risk) continues to be priced at less extreme levels.
This week will also see some high-profile earnings reports from the likes of Amazon (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL) and Meta (NASDAQ:META). Their fallout on US equities will probably also continue the recent positive correlation between US equities and the dollar.
Expect EUR/USD to continue trading around 1.1300-1.1400 for the time being. The worst case for EUR/USD is probably 1.1250, should US data surprise on the upside. 1.1500 is the risk, should any of this week’s job releases suggest that tariff uncertainty has already triggered layoffs.
USD: Positioning Data Shows a Split in Activity
After being bounced around by a devastating month of tariff news, the path for FX markets will be determined by hard US data this week. Here, US employment data will be closely watched for any signs that slumping US consumer and business confidence is resulting in layoffs. Any big downside surprise can trigger another leg of US dollar selling.
It’s been a quiet start to the week in financial markets, with cross-market levels of volatility falling. There has not been too much tariff-related news over the weekend, although it does seem US consumers could soon start to feel the bite. Reports suggest that Chinese fashion retailer Shein is raising prices for US consumers by up to 300%, while logistics groups are starting to report a slump in US air freight and container imports.
For FX markets, the focus this week will be on how much this tariff stress has hit real-world decision-making. Data highlights of the week include the first look at first-quarter GDP and the April jobs report on Friday. On GDP, consensus is around 0.4% quarter-on-quarter annualised, but the range of expectations is wide at +1% to -1%, depending on how economists feel the sharp front-loading of imports will be offset against some positive investment trends.
ING economists are looking for a reasonable 0.8% figure, thinking that consumer spending and investment can help. We are below consensus (+130k) when it comes to Friday’s jobs report, however. And we think it will be the jobs data which will be the dollar driver this week.
As my colleague James Smith discusses here, we should be looking at the jobs data for signs of any sharper US slowdown rather than at survey data like the ISM business survey released on Thursday. We’ll also see the JOLTS job openings data on Tuesday, where any sharp fall could trigger another leg lower in the dollar on the view that tariff uncertainty will drive unemployment higher.
The jobs data also seems key for the Federal Reserve, where board member Christopher Waller has said that the central bank could cut earlier and more deeply if unemployment rises sharply – although this may be something for the late summer when we know more about whether reciprocal tariffs will be reinstated after their 90-day pause.
With the market already pricing in around 125bp of easing into next year, taking the Fed Funds policy rate to neutral near 3.25%, the next big story for the dollar will probably be whether US data is weak enough to merit Fed policy being priced below neutral.
When it comes to FX positioning data, last week’s data from Chicago seems to confirm anecdotal reports that fast money/hedge funds have been taking profits on dollar short positions, while the buy side continues to sell dollars. The latter may also have a big say in price action this week, should investment committees have recently taken decisions to cut USD exposure. Looking out for fixing flows, especially around the 4:00pm UK WMR fix.
The data calendar is exceptionally quiet today, but lower volatility levels slightly favour higher equity markets and perhaps an uptick in the dollar too. We think there is still room for DXY to edge up to the 100.00/100.25 area – but that may be enough for this week.
CAD: Canada Goes to the Polls
Canada holds a general election today; here is our market guide to the vote. The Liberals, led by PM Mark Carney, are ahead in the polls, with the Conservatives trailing by around 3.5 points. The betting market attaches over 80% probability of a Liberal win, and 60% of Liberals securing a parliament majority.
We assume a majority Liberal government is the market’s baseline expected outcome, and would have a limited impact on the Canadian dollar. A hung government should trigger some pressure on the loonie, which could instead rally on a surprise Conservative win, as markets may see a smoother path for trade negotiations with the US.
Disclaimer: This publication has been prepared by ING solely for information purposes irrespective of a particular user’s means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more