Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
FX Update: EUR squeeze is on as ECB talks 50-bp hikes.
John J. Hardy
Chief Macro Strategist
Summary: A back-up in risk appetite and an ECB member wanting to put 50-basis point hikes on the table have the EURUSD teasing above 1.0500 today and the USD on its back foot across the board, with the JPY weaker still as the Japanese currency has been on a roller coaster since last week. Sterling got a boost from very strong data making a bit of a mockery of BoE Governor Bailey’s hand wringing on the coming recession.
FX Trading focus: Squeeze on USD longs, ECB talks 50’s, Strong UK data
EURUSD was rising in general sympathy with a squeeze on USD longs as risk sentiment improved again overnight on hopes that China is softening its stance on tech companies. But the EUR jumped aggressively later in the session today after ECB governing council member Klaas Knot said that fifty basis point hikes should be on the table if conditions warrant. This took ECB rate tightening anticipation for this year over 10 basis points higher, with a positive 50 basis point policy rate almost fully priced now (47 bps of this writing). This is the second day in a row of hawkish talk from the ECB after Bank of France head Villeroy warned on the weak euro yesterday. That rate through the December ECB meeting has jumped some 20 basis points over the last two sessions and is 14 basis points above the prior peak from earlier this month of 33 bps. Premature to call a EURUSD bottom, as we have simultaneously seen a robust bounce off equity market lows of late last week that is likely at least as decisive factor in pricing USD pairs recently. More thoughts in the EURUSD commentary below. Tough to see the ECB moving 50 basis points unless the EURUSD is challenging parity suddenly or unless the bank pre-warned on such a move and positioned it as a quick front-running of ending NIRP rather than setting a precedent for further hikes of that size.
For the latest on the status of the USD rally, watching the US Apr. Retail Sales today and Fed Chair Powell out speaking later today in a WSJ-interview (as US gasoline prices hit a record high and the Fed has recently seemed to want to step back from driving the anticipated pace of tightening higher.)
Chart: EURUSD
EURUSD retook the important 1.0500 area intraday today, a level that was a clear sticking point on the way down. Watching the close today for whether the move sticks and if it does, it could point to a follow through into the next important resistance level at 1.0642, which is also near the 2020 low for the pair. A more profound reversal will take a significant further pull higher, well above 1.0800, so it is too early to discuss more than a tactical reversal. Also watching US data later today and importantly, ECB President Lagarde out speaking much later today.
Bank of England Governor Bailey broke out the word “apocalyptic” to describe the risks from food prices for parts of the world and generally fretted the UK growth outlook in testimony before a parliamentary committee yesterday, at the same time bemoaning the inability of the BoE to do anything about supply chain constraints that suggest a stagflationary outlook. The hand-wringing role seems to suit Mr. Bailey as it allows him to deflect blame for any of what is transpiring. But it doesn’t help sterling shorts when the UK posts strong economic data points like those in today’s labor market data, including a -56.9k drop in Jobless Claims in April, with a massive downward revision to the March data (from -46.9k to -81.6k). The March 3-month rolling employment change was +83k, the strongest in 5 months, while the April PAYE payrolled employees data jumped to +121k vs. +51k expected and was thus the strongest since July of last year. UK 2-year rates jumped about 7 basis points on the data. Yes, employment data is lagging, but it still impacts the market.
Watch out for tonight’s Australia wage data – this could set RBA expectations on edge in either direction on a particularly large surprise. The RBA minutes showed the RBA considered three options for hiking rates – the 15 basis points option (to get rate up to round 0.25%), the actual 25 basis point hike which was decided, and a 40-basis point option. The last of these surprised the market and here we have AUDUSD backed up well above 0.7000 as of this writing. It looks like the pair can afford a squeeze into the 0.7050-0.7100 zone without pointing to a bullish reversal, but if the price action pulls higher still, it begins to soften the downtrend.
Table: FX Board of G10 and CNH trend evolution and strength.
A big hot momentum change in GBP of late and in the euro today, though the trend measurements take more than a day to begin turning. Elsewhere, the USD (and JPY) absorbing most of the negative pressure of last couple of sessions.
Table: FX Board Trend Scoreboard for individual pairs.
EURUSD has reversed back above key first resistance at 1.0500 as discussed above, now watching last gasp local support in a pair like USDCAD (a bit of a squishy zone, but arguably a close below 1.2800 starts to look pretty threatening for USD bulls there), while the AUDUSD resistance zone is noted above.
Upcoming Economic Calendar Highlights (all times GMT)
- 1230 – US Apr. Retail Sales
- 1315 – US Fed’s Harker (non-voter) to speak
- 1315 – US Apr. Industrial Production and Capacity Utilization
- 1400 – US May NAHB Housing Market Index
- 1700 – ECB President Lagarde to speak
- 1800 – US Fed Chair Powell Interview at event
- 1830 – US Fed’s Mester (voter) to speak
- 2350 – Japan Q1 GDP estimate
- 0130 – Australia Q1 Wage Price Index
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