Pound’s, dollar’s and euro’s pros and cons

The US Dollar rallied, extending the bounce out of the lows seen yesterday following sub-forecast April ISM and March construction data. The narrow trade-weighted USDindex lifted back to yesterday’s 2-week peak at 91.39. A bullish medium-to-longer term view of the US Dollar has been retained this week as the prognosis for the US economy remains unchanged despite yesterday’s data disappointments, and upside risk should be factored on Friday’s release. Markets should also be factoring in the possibility of a peer-bearing doubt digit quarterly GDP growth in Q2.

Elsewhere, EURUSD tested the waters the 1.2000 for the first time in a couple of week. The pair continues to be largely driven by broader directional shifts in the USD. With the US economy building up a head of steam on the back of the Covid vaccine rollout, alongside the release of pent-up consumer demand and the outsized, record-level of fiscal stimulus, and with a central bank that remains steadfastly in uber-accommodative mode, the risks for inflation, and the dollar, are to the upside. The upward trajectory for US price increases into 2021 extends beyond the much-touted base effects that are clearly lifting the y/y measures.

In sum, a rising bias in longer-dated US yields is likely to re-establish as markets return to pricing in contingency risk that the Fed may be forced to tighten sooner than the 2024 start point for tightening that it has been signaling.

As for the Euro, peak pessimism about the Covid situation looks to have passed, and Eurozone growth and inflation are set to rise, but lag the US. The ECB left policy settings unchanged in April while signalling an unambiguously dovish bias and kicking the decision on whether to extend the PEPP (Pandemic Emergency Purchase Program) down the road.

As of the Pound in the meantime, even though the the stellar UK PMI report, which was revised higher in the final April manufacturing reading, to 60.9 — the best since the record 61.0 reading that was seen in July 1994, given a boost to Pound, the pressure is still there. The data also showed a sharp increase in prices changed to clients as manufacturers passed rising costs on to clients, which combined with rising employment won’t go unnoticed by the BoE.

Markets have already been anticipating upgraded growth and inflation forecasts in the Old Lady’s upcoming release of its quarterly Monetary Policy Review (released Thursday). The 2-year gilt yield rose back towards recent highs near 0.085% in the wake of the data, and the 10-year gilt yield is zoning in on recent highs. The Pound is registering as the second strongest of the currencies we keep tabs on (being the G10 units plus some others, such as the Australian and New Zealand dollars), with the US Dollar the strongest.

Cable pared earlier declines in to levels around 1.3838. Yesterday’s closing level is at 1.3909-10. The UK has in the meanwhile pegged respective 2- and 12-day highs versus the Yen and Euro, and a 13-day high against the Aussie. As explain last week, the bullish view on the pound against the Euro, and more especially the low-yielding currencies of surplus economies, such as Japan and Switzerland, which is hinged on the expectation that the global pandemic recovery trade expected to continue into 2022. The UK’s main equity indices are replete with globally-focused cyclical stocks, which should benefit as major economies rebound.

The broad trade-weighted value of the Pound still remains near historically weak levels, too. Local elections loom on Thursday, where a particular focus will be on whether pro-independence Scottish parties can reach the supermajority threshold. Polling suggests it’s too tight to call.