The narrowing of the yield differential between the US and Germany met some resistance late last week as a reassessment of the US two-year interest rate following Governor Waller’s comments on the rise in eurozone yields was outpaced by news from European Central Bank sources which confirmed the debate within the Governing Council is Currently between 25 bps and 50 bps in May. With the euro trading at its highest level so far this year, the single currency lost 0.6% against the dollar, returning to the narrow range it traded in during the first quarter. This week, the ECB’s upcoming policy decision will remain at the forefront of traders’ minds, especially with the rather dense schedule of ECB speakers and the release of minutes from the March meeting on Thursday. Spreads aside, growth conditions will also remain critical for the single currency. The release of China’s Q1 GDP on Tuesday may have positive implications for the growth profile of the Eurozone, which could become evident in the release of April PMIs on Friday. As a pro-cyclical currency, a better external growth profile is likely to be a tailwind for the Euro.
Growth conditions dominated last week’s session, even in the absence of direct data on economic activity. Instead, inflation reports, Fed minutes, FOMC comments and Friday’s retail sales were analyzed in terms of the economic situation. Although data for most of the week confirmed that the US economy was not headed for a recession before credit tightening, sending risky assets higher, Friday’s headlines delivered the notion that the Federal Reserve may have to raise interest rates to a level Above the 5-5.25% range currently being considered in the markets. The comment from Fed Chair Christopher Waller caused the markets the most damage of the day, as he announced his support for further monetary tightening to reduce persistent inflation unless credit conditions are significantly tightened. Shortly thereafter, a one percentage point increase in the University of Michigan’s one-year inflation forecast to 4.6% caused Treasury yields to start rising again and the two-year note to fall above 4%. The dollar fell about 0.56 percent, far from its lowest level so far this year.
The choppy decline in the greenback last week sums up our view of the dollar in general going forward. While we continue to see arguments for a structural deterioration, it remains difficult for economic data to support a steady downward trend. This week, the focus will likely continue to be on growth conditions and whether the US economy remains as exceptional as it was at the end of last year. In a rather weak week for US data, the Fed’s beige book on regional economic conditions will be watched closely for signs of credit stress for small and medium businesses, while flash PMIs for US data will be released on Friday, also in April. US data will also be against key data from the UK, Eurozone and China. If foreign growth conditions continue to outpace those in the United States, the dollar could slide further towards the bottom of the dollar smile.
The pound sterling was flat against the dollar over the past week in the absence of any local data, and as the spillover effects of the improved risk environment soon reversed on Friday when the pound fell by 0.86%. This week’s domestic data calendar will come back online for the pound and will be crucial to the BoE’s next steps. The February jobs report and Wednesday’s March inflation data stand out as having the most influence on the BoE’s next steps, particularly given the BoE’s focus on tracking wage measures as a source of continued domestic inflation and given that February’s PMIs showed demand for labor had He turned back. in the layout. However, with the retail sales for March released on Thursday and the April PMI on Friday, investors will be treated to a full report on the UK economy this week.
During Friday and into the opening of today’s European session, Latin American currencies with a beta high level continued to maintain their momentum despite the strong rally of the US dollar late last week. Within these, BRL stood out by far, recording a gain of 0.38% on the day, followed by COP and PEN. With what seems to be a light week in terms of economic data, both in the US and Latin America, we confirm once again that attention is focused on the development of global risk sentiment, and on domestic political events in Brazil. Following the return of President Lula da Silva from his trip to China and according to the announcement in the national media last week, it is likely that we will see the official proposal for the new fiscal framework presented to Congress later this week. An event that, not only because of its importance, but also because it was postponed in time, will generate a lot of anticipation among BRL watchers.