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Major currencies trade in tight ranges as emerging markets give up some gains

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24 April 2023

Written by
Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.

In the absence of major macroeconomic news or central bank decisions, the euro, dollar and Sterling all traded in tight ranges against each other while risk assets retreated modestly from the year highs achieved the week prior. These moves were not strong enough to change the broad trend of 2023: a weaker US dollar and stronger emerging market currencies, led by Pacific Rim and Latin American ones.

T
his week also looks to be a quiet one, the calm before the storm of the various central bank meetings in May. Focus will be on the March US PCE inflation and the first quarter GDP report Thursday followed by early April inflation reports from individual Eurozone countries on Friday. The Bank of Japan meets early Friday morning, and there is always a potential for surprises there, given the tension between the Bank’s ultradovish policy and rising inflationary pressures there.

GBP

A blowout employment and wages report last week, followed immediately by yet another unpleasant surprise in the May inflation report, validate our view that the Bank of England still has plenty of work to do in taming inflationary pressures, just as its counterpart across the Channel. EVen after last week’s rise, terminal expectations for the Bank rate are still below 5%, which we consider insufficient when core inflation remains stubbornly above 6% and wages have caught up with that level. With little news of note this week, we expetc Sterling to trade tightly with the Euro.

EUR

The main economic report last week was the PMI indices of business activity. Two trends stand out. One, the Eurozone economy is accelerating, led by the services sector. Two, the industrial sector is lagging, and the effect of China’s reopening has not yet shown up in manufacturing sentiment. At any rate, it is clear that the risk of recession has vanished and that the ECB still has a lot of work to do in taming inflationary pressures, specially given stickier inflation and wage dynamics in the Eurozone compared to the US. This suggests to us that the medium-term trend in the Euro should be upward.

USD

Last week was also light in terms of macroeconomic data, but weekly jobless claims provided some more evidence that the US job market is cooling as Fed tightening filters through to the economy with the usual lags. On the other hand, the PMI business activity numbers surprised to the upside. Clearly, the signs of economic slowdown remain very tentative and data must be followed closely. This week’s PCE inflation report for March and the early estimate of first-quarter GDP growth will be in focus, though both are somewhat backward looking and unlikely to change minds or move markets.

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