European currencies managed to recover from losses on Thursday and secured net gains on Friday.
The Pound to Dollar (GBP/USD) exchange rate dipped to near 1.2450 after Thursday’s US GDP prices data, but recovered quickly to near 1.2500 and traded around 1.2535 on Friday.
There will be further volatility on Friday with a key inflation release and speculation over Bank of Japan intervention to support the yen.
US data was mixed on Thursday with weaker GDP growth, but stronger-than-expected inflation.
MUFG commented; “The market reaction to the data has been interesting and certainly looks to us like indicating limits to further US dollar strength at this point.”
The US economic data will continue to be watched closely in the short term with the PCE prices data due on Friday.
Consensus forecasts are for an increase in core prices of 0.3% for March, but markets are now expecting a 0.4% increase after Thursday’s inflation data.
Strong inflation data will make it more difficult for the Fed to cut interest rates.
The bank will provide updated guidance at next week’s FOMC meeting.
Unicredit expects that the Euro and Sterling will be resilient; “The slight decline (on an annual basis) we expect for the Core PCE deflator, while it will probably remain steady at +0.3% mom, will probably help both the EUR and sterling hold yesterday’s gains.”
According to ING; “the main drivers of FX all point to a stronger dollar: higher Treasury yields, widening swap differentials in favour of the dollar, and falling equities.”
ING expects dollar gains; “The FX market has moved autonomously since the GDP release yesterday, but it would not be the first time that the dollar reconnects with rates and equities with a small lag. We think this is likely to happen today or early next week unless PCE data surprisingly offer hopes on inflation today.”
According to Danske Bank; “The preference for the USD still dominates in the current environment, with speculative investors gradually increasing their net long USD exposure, attracted by its dual appeal of high yield and defensive status.”
It did, however, add; “Given that the USD long trade has become increasingly crowded, the distribution of outcomes for US data is likely skewed towards very strong numbers to achieve additional substantial USD gains. This could lead to some short-term weakness in the USD if economic data surprise negatively in the near term.”
Bank of England expectations will also be a key element for the Pound with UK data remaining under scrutiny.
The UK GfK consumer confidence index edged higher to -19 for April from -21 previously and slightly stronger than consensus forecasts of -20.
Four of the main indicators improved on the month while confidence in the personal finance reading for the next 12 months was unchanged.
According to Joe Staton, Client Strategy Director GfK commented; “These improvements reflect the impact on household budgets of lower inflation and the anticipation of further tax cuts.
Although he was hopeful for a further net improvement there was still an element of caution; “However, we are a long way from the much firmer sentiment last seen in the period before Brexit, Covid and the conflict in Ukraine. There is a lot of ground to make up, and caution is needed in the face of continuing economic and fiscal challenges, and revised views on when the Bank of England might cut borrowing costs.”
According to RBC Capital Markets; “Given the rhetoric from the Bank, we still see the MPC delivering rate cuts this year commencing in August, a meeting at which new forecasts will be available and a press conference will be held.”
