FX daily: Data and trade talks may not be enough to revive depressed volatility

Currencies may struggle to deviate from the current low-volatility trend ahead of tomorrow’s FOMC. Biden-EU trade talks may give only mild support to the EUR, while GBP has room to rise despite re-opening delay. NZD is finding some consolidation ahead of tomorrow’s GDP, which we expect to prove supportive for the currency.

USD: Cruising speed into FOMC

The vicinity to the FOMC rate announcement (tomorrow) appears to be encouraging a wait-and-see approach in markets, which is resulting in an ever more depressed volatility environment in FX. The very contained moves seen in G10 so far this week have followed the lines of a broad improvement in global risk appetite, with NOK in particular being pushed by oil reaching two-year highs, and the yen losing some ground as the Treasury rally stalled. CFTC data released last Friday showed how the decline in US yields prompted speculators to trim their net-short positions on the yen, although the room for further short-squeezing remains sizeable. Today’s focus in the US will be on some data releases, including May’s retail sales, where a combination of slower auto sales and some consumers’ spending shifting back to services such as travel or entertainment (not included in retail sales) are likely to contribute to a negative MoM read. May’s industrial production and May’s PPI will also be watched, and our economist expects two solid reads. Today’s data flow looks unlikely, however, to drive any meaningful change in rate expectations ahead of tomorrow’s Fed meeting, and the risk is that another very calm day lies ahead for most G10 dollar crosses today.

EUR: Limited FX impact from an end to the Airbus-Boeing dispute

Following the G7 meeting over the weekend and the NATO summit yesterday, US President Joe Biden will meet with EU leaders today. Trade and tariffs will likely be the main theme under discussion, with the Airbus-Boeing subsidy dispute set to be resolved, according to media reports. Signs of further unwinding of the Trump-era protectionist agenda by President Biden should be welcomed by European sentiment, although there is likely very little priced in when it comes to EU-US trade-related downside risk to the EUR, so the currency impact should not be material today.

GBP: Very contained spillover from reopening delay

The UK Government has delayed its plans for a full re-opening of the economy until July due to the recent rise in Delta-variant cases across the country. The move was well telegraphed and had no market impact. Moreover, we think that a delay in the full re-opening does not materially change the positive underlying economic recovery narrative for sterling, and data released this morning continued to endorse such narrative, as jobless claims dropped even more in May than in April.

NZD: Looking for some consolidation ahead of GDP data

The Kiwi dollar is attempting to find some consolidation amid a broadly supportive risk environment this week as we towards tomorrow’s GDP numbers for Q1. We think we will see YoY growth rebounding from the double-dip recession to close to the 1% YoY mark. Given the quarterly frequency of most important data releases in New Zealand (including inflation and labour data), the release should be a key currency driver this week, and evidence of economic rebound after the underwhelming 4Q20 numbers may offer some stabilization to NZD as it endorses the recent hawkish shift by the RBNZ. Also contributing to keep rate expectations up have been the latest housing data for May, that continued to show an increase in house price in NZ despite the government’s actions to curb the bubble, which suggests an earlier monetary tightening cycle might be needed. NZD's closest peer, AUD is also set to face a key release this week (labour data), and was not touched from the release of the June RBA minutes overnight.

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