FX daily: Treading carefully

FX markets open the week on a cautious note as they process a pick up of Covid-19 cases in Asia and some slightly softer Chinese data. However, the quiet US calendar (where the April FOMC minutes are the highlight) points to a benign week for risk and probably a slightly softer dollar.

USD: Commodity story takes a breather

Over recent weeks the surge in commodity prices, especially those of industrial metals, have dominated financial markets. This has kept the focus very much on the subject of unchecked inflation and also the terms of trade gains to be enjoyed by commodity exporters. That narrative has seen a modest setback at the start of the week as Asia responds to higher Covid-19 cases and China's April data slightly disappoints. Yet it seems this potentially negative development for global activity will be overlooked by investors as they focus on re-opening stories in the US and particularly Europe. As we discuss in the G10 FX Week Ahead, a light week for US data suggests the focus will once again be squarely on the Fed - particularly Wednesday's release of the April FOMC minutes. We think these should still contribute to a benign environment. Today we'll also hear from the Fed's Richard Clarida and see what he has to say about last week's April CPI release. We expect him to attribute the jump to base effects and bottlenecks and emphasize its transitory nature. Expect DXY to trade out a 90.00-91.00 range. 

EUR: Watching the BTP:Bund spread

EUR/USD has held up pretty well in the face of the first wave of stronger US activity and price data. There will be a lot more to come here - but at least confidence in the Eurozone recovery is growing and should be reflected in Friday's first look at Eurozone PMIs for May. That said, the EUR is a little soft on the crosses within Europe, which may be driven by the recent 20bp widening in the BTP:Bund spread. Here the bond market is starting to price tapering of the ECB's PEPP scheme at the June 10th ECB meeting - a PEPP scheme in which Italian government bonds have been one of the largest beneficiaries.  We forecast a 1.2050-1.2200 range for EUR/USD this week - with Fed speak probably the greatest driver.

GBP: Re-opening optimism

It has been a well-telegraphed move, but major re-opening in the UK today should continue to be welcomed by UK asset markets and the pound. Despite threats from the Indian variant, the scheduled re-opening will keep expectations of a summer UK recovery on track and feed into the BoE's upbeat assessment of the UK activity outlook. We would also like to repeat the point about the switch from growth to value investing as the business cycle matures. This would, for example, favour a rotation from growth-centric US equity benchmarks to indices such as the UK, where the value sectors of financials and industrials have a much larger weighting. Cable looks comfortable above 1.4100 and barring any surprisingly hawkish comments from the Fed this week, Cable can test the 1.4165/4200 area.

CEE: Positives are growing

CEE FX continues to perform well and the positives - largely driven by monetary normalization stories - are growing. Since March, the CZK has been leading the pack in terms of strength, but PLN has recently been playing catch-up as the Polish MPC has turned less dovish. As our Polish team points out, a change in composition of the Polish MPC towards a more hawkish setting could also help the PLN. And this morning we have just seen comments from the NBH that a hike in the benchmark rate could be coming in June. This has surprised markets that had felt the NBH would be late to hike and this news could send EUR/HUF towards the 350 area.

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