Sterling eased against the U.S. dollar as traders eye BoE decision

Reuters: Sterling eased against the U.S. dollar on Tuesday but stayed close to the previous day’s one-year high, ahead of the Bank of England policy decision later this week. 

British Pound Sterling eased

At 0904 GMT, the pound was down 0.3% against the dollar at$1.26145, while it ticked 0.17% higher versus the euro to 87.06 pence. Sterling remains close to a more than one-year high hit on Monday, when it touched $1.26680 – the strongest level against the dollar since April 26 2022. Stronger-than-expected economic data in the UK, which has so far dodged a deep recession, is one factor behind the pound’s robust performance, as well as a weaker dollar, which has been dragged down by slower U.S. inflation and by growing expectations that the Federal Reserve is nearing the end of its rate hiking cycle.

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The BoE has raised interest rates 11 times since December 2021 as it battles to bring down double-digit inflation. For Simon Harvey, head of FX analysis at Monex Europe, a key factor to watch will be how the BoE manages expectations. “Given the BoE has been consistent in pushing back on market expectations, should the market implied inflation forecasts not show inflation substantially falling below the 2% target over the medium-term, sterling is likely to rally,” said Harvey. Traders are predicting a 98% chance of a 25 bps hike from the BoE this week. The market is also awaiting key U.S. inflation figures on Wednesday which will provide more direction on the world’s largest economy’s battle against inflation.

US Dollar

Reuters: The dollar weakened broadly on Wednesday after U.S. President Joe Biden and top lawmakers failed to break a deadlock on the debt ceiling crisis, though currency moves were marginal amid caution ahead of U.S. inflation data later in the day. Biden and House of Representatives Speaker Kevin McCarthy remained divided over raising the $31.4 trillion U.S. debt limit following talks on Tuesday, with just weeks to go before the United States may be forced into an unprecedented default. The two, however, agreed to further talks and committed their aides to daily discussions about areas of possible agreement. Biden, McCarthy and the three other top congressional leaders are set to meet again on Friday. The greenback slipped in early Asia trade, with the euro rising 0.11% to $1.0971 and sterling gaining 0.1% to $1.2634. The kiwi edged 0.05% higher to $0.6338.

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“There has been a lot of attention lately on the debt ceiling issues,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia. “I don’t think the issue will be resolved anytime soon. Typically, in the past, the issues usually get resolved very last minute. “So that means there could be some more volatility in markets, and I think the dollar could weaken even further, as we have seen in the past.” Against a basket of currencies, the U.S. dollar index was last 0.07% lower at 101.55. Also preoccupying investors was U.S. inflation data, with economists polled by Reuters expecting a 5.5% year-on-year increase in core consumer prices for April. A stronger-than-expected reading could prove a headache for the Federal Reserve, which had just last week opened the door to a pause in its aggressive tightening cycle, having delivered 10 consecutive rate hikes since March 2022.

“The bar is high for a Fed response to data surprises in either direction,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank. “Having concluded 500 bps of rate hikes and anticipating some credit tightening from a shake-down amongst regional banks, the Fed is unlikely to tighten further on merely ‘sticky’ inflation, instead requiring re-acceleration of inflation.” Money markets are pricing in a roughly 82% chance that the Fed will keep rates on hold at its next meeting in June, and expect rate cuts to begin in July through to the end of the year. Rising expectations that the Fed will begin cutting rates later this year have been driven by recent stress in the banking sector that was triggered by the collapse of Silicon Valley Bank in March. Elsewhere, the Japanese yen rose 0.1% to 135.11 per dollar.

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Bank of Japan Governor Kazuo Ueda said on Tuesday the BOJ will end its yield curve control policy and then start shrinking its balance sheet once prospects heighten for inflation to sustainably hit its 2% target, though his comments did little to lift the yen. “What Ueda said was not surprising at all,” said CBA’s Kong. “I think markets are already expecting the Bank of Japan to make some moves.” The Australian dollar was last 0.08% higher at $0.67675. Australia’s Labor government on Tuesday reported the first budget surplus in 15 years, as strong jobs growth and bumper mining profits swelled its coffers.

South African Rand

Reuters: The South African rand and stocks fell on Tuesday as the dollar edged up ahead of closely watched U.S. inflation data due this week. At 1640 GMT, the rand traded at 18.6400 against the dollar, about 1.7% weaker than its previous close. The dollar was up about 0.27% against a basket of major currencies. There were no major South African economic data releases on Tuesday, leaving the rand to take its cues from global drivers. Investors are keenly focused on Wednesday’s U.S. consumer inflation report after Federal Reserve chair Jerome Powell said last week that policy decisions will be “driven by incoming data,” while signalling a likely pause in the rate hiking cycle.

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The rand has underperformed relative to emerging market peers this year as a power crisis showed no sign of abating and investor sentiment has been sapped by the country’s “greylisting” by international financial crime watchdog the Financial Action Task Force. The currency is down more than 7% against the dollar year-to-date. On the stock market, the blue-chip index of top 40 companies and the broader all-share index ended down 1%. South Africa’s benchmark 2030 government bond was slightly weaker, with the yield up 3 basis points at 10.360%.

Global Markets

Reuters: Stocks were struggling to advance in Asia and the dollar was firm on Wednesday ahead of U.S. consumer price data that could damage hopes for interest rate cuts later this year if inflation fails to show much of a decline. MSCI’s broadest index of Asia-Pacific shares outside Japan had fallen on Tuesday and inched down a further 0.3% early on Wednesday. Japan’s Nikkei fell 0.4%. Overnight the S&P 500 fell 0.5% and S&P 500 futures were steady in the Asian morning. A firm U.S. dollar pushed the euro back below $1.10 to $1.0971. April U.S. consumer price data is due at 1230 GMT and economists expect the headline CPI to hold steady at an annual 5% and core CPI to moderate very slightly to 5.5%, though anything stickier could confound bets interest rates will fall. “That’s the thing that’d get taken out if CPI numbers come in on the higher side,” said ING economist Rob Carnell. “It doesn’t look particularly sensible if inflation is falling at too slow a rate and that could feed through into higher longer-term treasury yields as well.”

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Treasuries were broadly steady overnight, though debt-ceiling brinkmanship is warping the bills market as investors avoid bills maturing early in June. Demand at a three-year auction was strong, with a bid-to-cover ratio of 2.93 – the highest since 2018 according to analysts at NatWest markets. Benchmark 10-year yields held at 3.507% in Asia. Two-year yields were at 4.018%. President Joe Biden and top lawmakers failed to break a deadlock over raising the $31.4 trillion U.S. debt limit, but vowed to meet again with just weeks before the country may be forced into an unprecedented default. The uncertainty is ironically driving demand for bonds, however T-Bills maturing early in June are out of favour and yielding 5.6% – the highest in decades and above the Fed funds rate.

In China and Hong Kong April’s weak import figures held down stocks for a second straight session, as investors fret the reopening rebound is fading into an uneven recovery. Hong Kong’s Hang Seng fell 0.4%. The Shanghai Composite dropped 0.8% and the yuan edged lower. An apparent crackdown on due diligence firms is also unnerving investors. Foreign exchange markets have been treading water while markets weigh policymakers’ rhetoric against traders conviction that U.S. interest rates, and the dollar, should fall. European Central Bank board member Isabel Schnabel said on Tuesday expectations for rate cuts were misplaced, but that didn’t give the euro much of a boost against a dollar, as traders have been reluctant to sell too hard ahead of the CPI data.

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The common currency was pinned below $1.10 on Wednesday. The dollar was also firm at 135.14 yen and has lifted slightly from recent lows on the Aussie, kiwi and sterling. “The dollar may receive a temporary boost after the CPI,” said Commonwealth Bank of Australia strategist Joe Capurso. “But the debt ceiling drama, and market participants’ focus on rate cuts is unlikely to change much from one CPI report. It may take a strong result, to push up the dollar materially.” Earnings for Softbank, Panasonic and a handful of Japan’s giant bellwether trading houses are due after market close in Tokyo on Wednesday. Shares in U.S. casino operator Wynn Resorts were steady in after-hours trading after it reported better-than-expected revenues. Airbnb shares fell about 12% after the bell as it forecast fewer bookings and lower prices. Brent crude futures hovered at $77.01 a barrel. Gold is starting to settle in above $2,000 an ounce, while bitcoin steadied at $27.732.

Published by the Mercury Team on 10 May 2023

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