News & Analysis


With yet more signs of economic resilience in the US, it was unsurprising to see the loonie outperform on Monday, with only the Japanese yen posting a better performance amongst G10 FX as investors remain cautious over potential intervention. Even so, the loonie still fell two tenths against the dollar, and should have fallen further in our view. Significantly, the BoC’s Business outlook survey offered a grim readthrough on the prospects for the Canadian economy. While the survey balance rose from -3.2 to -2.4 in Q1, the outlook for future sales collapsed from 20.0 in Q4 2023 to just 1.0 in this latest release. This is consistent with economic stagnation and little signs of improvement on the immediate horizon, an exceptionally poor performance for an economy where population growth is running at 3-4% per year. Taken as a whole, the survey once adds to a growing body of data evidencing the damage that high rates are doing to the Canadian economy. Even so, we suspect that the BoC will be focused on the inflation expectations readings that continue to point to some remaining stickiness, and will likely point to this as a reason to keep rates on hold at their meeting this month. We remain somewhat more sceptical. Headline inflation is already back within the BoC’s target band, and a growing output gap should see further disinflation playing out over coming months, especially if the labour market continues to unwind. Data to this effect on Friday will be closely monitored for this reason, although we suspect it won’t be sufficient for the BoC to fall on its sword and cut rates later this month. Resultantly, yesterday’s report confirms that any delay to cut rates is now likely to mean further scarring and economic underperformance later this year, a dynamic that we expect should weigh progressively on the loonie through Q2 and beyond.


Markets spent much of the first quarter speculating on the Fed’s ability to cut rates this year, although the focus ultimately turned towards a flatter overall profile of easing in late March as the Fed’s updated economic projections displayed upwards revisions to growth and interest rate projections from next year onwards. The backdrop of a more hawkish Fed was subsequently confirmed by comments from Governor Waller and then Fed Chair Powell last week, with the latter compounding Waller’s call for caution by stating that the central bank was in “no hurry” to reduce rates. The environment of higher Treasury yields and a stronger dollar in the first quarter fell in line with our base case outlined in our 2024 year ahead, which stressed that the US exceptionalism narrative hasn’t yet expired and strong growth conditions would likely produce some modicum of inflation persistence.

We expect more of the same in the second quarter, although this time it should lead to greater divergence in rates and year-to-date ranges across most major currency pairs to be broken. This was already visible yesterday as the ISM manufacturing report defied expectations, showing an expansion in order books and, more significantly for markets, the fastest rate of input inflation since July 2022. This led Treasury yields to jump 10bps across the curve and the dollar DXY index to snap back above the 105 handle for the first time since mid-November, a level that we had expected to be breached at the end of Q1.  Looking out to the rest of Q2, we suspect markets will remain on tenterhooks over the Fed’s ability to cut rates in June, while weak growth and inflation conditions in Europe and Canada should see the ECB and BoC detach from the Fed with more aggressive easing cycles. Ultimately, we think we could see EURUSD plumb as low as 1.05 and USDCAD climb to the 1.38-1.40 region this quarter should their respective central banks turn notably more dovish against a Fed that opts to delay any easing until Q3 at the earliest.

Closer on the horizon, however, markets will be paying close attention to whether the more cautious stances by Powell and Waller are shared amongst the rest of the FOMC as a litany of speakers are scheduled this week. Today, New York Fed President John Williams at 17:00 BST  is the noteworthy member to watch. For the rest of the week, focus stateside will be on Chair Powell’s comments on Wednesday afternoon, the ISM services PMI on Wednesday to see if it compounds the hawkish signal from the manufacturing report yesterday, and March’s jobs data on Friday. In the interim, however, markets are likely to favour defensive positions in the dollar as the bar for the Fed to commence easing has risen while headlines this morning are dominated by an amplification of tensions in the Middle East. Alongside news of production cuts in Mexico, this has led oil benchmarks to crack fresh highs, further threatening more global inflation just as most central banks eyed the start of policy easing.


With much of Europe out yesterday for the Easter holiday, the single currency found little support as US yields ramped higher and the dollar gained ground across the board. European currencies were particularly hit, with SEK and NOK tumbling over a percent against the greenback, while EURUSD shedded half a percent to plumb fresh six week lows. We suspect downside momentum could extend this week should inflation data from Germany today at 13:00 BST and the eurozone tomorrow at 10:00 BST also display more benign inflation pressures like that in the French, Spanish, and Italian flash data last week. If this is the case, we suspect markets will eventually begin to price diverging paths for the ECB and the Fed, a dynamic that could lead EURUSD to break through the 1.07 handle this week, especially if the cooler inflation data coincides with data out of the US supporting higher Treasury yields.


Whilst traders in the UK enjoyed a bank holiday on Monday, FX markets remained open and alert to the data out of the US. A notable upside beat for ISM manufacturing PMIs did little to dispel the notion that the US economy remains exceptional, boosting the dollar at the expense of the pound, which dropped seven tenths of a percent. That said, UK investors return to the office with some of their own data out this morning to chew over, with both the latest BRC shop price and nationwide house price data being published just after midnight. The former fell sharply in March, growing just 1.3% YoY, down from 2.5% in February and below the consensus economist forecast of 2.2%. The Nationwide house price index, meanwhile, also undershot expectations in March, easing by -0.2% last month. All told, we suspect both releases are likely to be welcomed at the BoE, pointing to easing demand pressures across the UK economy, a dynamic that should keep disinflation on track in the coming months, with the focus for markets likely to remain whether the BoE starts cutting rates in June or August. That said, the BoE’s easing path is likely to commence later than its peers, an outcome that should keep sterling insulated from broad dollar strength on the back of a more hawkish Fed. This is visible this morning, with GBPEUR retracing Monday’s losses to trade back close to the 1.17 handle and around the highs of its range since the global tightening cycle commenced.



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