Market Overview

Range trading continues as markets prepare for Wednesday’s CPI

  • Dollar recovers somewhat while US stocks’ rally stalls
  • PPI and Fed Chairman Powell could wake up the market later today
  • Mixed UK labour data complicate the BoE’s outlook

  • Dollar recovers but still in the red during May

    Range trading continues in most currency pairs as the market is in waiting mode for tomorrow’s crucial US inflation report. The US dollar managed to reverse yesterday's initial underperformance against the euro with the pair now hovering below the 1.08 level and facing some key resistance levels. It has been a tough first half of the month for the dollar as it has been underperforming across the board, apart from the yen.

    On the other hand, following the recent Fed meeting essentially removing any fears of rate hikes during 2024, stocks feel more relaxed. The S&P 500 index is just 1% shy of its all-time high and, despite the evident economic divergence between the US and the euro area, European equity indices continue to record new highs, outperforming their US counterparts.

    PPI and Fed Chairman Powell in today’s calendar

    The producer price index (PPI) for April will be published today. Both the headline and core indicators have eased considerably from their 2022 highs, but they remain at the upper end of their pre-Covid range. They have recently been edging higher, pointing to renewed inflationary pressures in the near term.

    With Monday’s New York Fed inflation expectations for one year rising to 3.3% from 3.0%, another upside surprise in today’s PPI report might not be taken lightly by the Fed hawks. The market is assigning a 5% probability of a June rate cut with this probability rising considerably for the September meeting.

    After a slow start, Fed speakers are expected to increase their public appearances, especially following the US CPI release. Having said that, two Fed members are scheduled to be on the wires today. Fed’s Cook, a 2024 voter, is unlikely to diverge from the May 1 Fed meeting message and, more interestingly, Chairman Powell will speak alongside ECB member Knot in Amsterdam later today.

    UK labour data remain tight

    The much-expected April Claimant Count report showed a smaller than expected increase, possibly disappointing the Bank of England doves. Even worse, average earnings growth has failed once again to ease, with the indicator that excludes bonuses remaining north of 6% for the 15th consecutive month. Most investment houses are rooting for a June rate cut, with their hopes pinned on next week’s CPI report showing a significant drop.

    In the meantime, political developments could prove a headache for the BoE and pound going forward. The recent local elections’ outcome opened the door to a possibly disastrous result for the Conservative party at the national elections, increasing the aggressive commentary from party members. The most recent episode involves a Tory’s heavyweight attacking the BoE’s quantitative tightening strategy and questioning its independence.

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