Daily Currency Update

USD - US Dollar

The current state of the FX markets suggests that traders are exhibiting caution towards taking risks. The recent gains of the USD seem to reflect market sentiment rather than any notable change in the outlook. It is widely assumed that the Fed is on the verge of completing its tightening cycle, with an anticipated 25bps hike next month. After that, it is expected that the Fed will take a step back, while the ECB and BoE continue to gradually increase their rates over the next few months. However, the potential for USD to increase further appears limited, unless there is a significant extension of the Fed hike bets or a reversal in ECB tightening expectations. The challenges for the USD remain apparent, and the market is pricing in an aggressive rate cut by the Fed into 2024 compared to the ECB and BoE. Moreover, the looming debt ceiling issue could negatively impact the USD sentiment during the summer period.

CAD - Canadian Dollar

The CAD, along with other commodities, is experiencing a decline and is likely to end the week with a weak finish, falling above the 1.35 mark. The weakening of the CAD is a result of a wider gap in US-Canada spreads this week and lower oil prices, which have retreated to pre-OPEC+ supply cut levels. Governor Macklem remarked that the CAD has already factored in the higher rates in the US in compared to Canada, as reflected in its current value. This implies that the CAD has limited potential for upside, based on the policy divergence. The CAD is struggling to maintain a strong position, and investors remain pessimistic. Canada is scheduled to release its February Retail Sales data at 8:30 AM ET, and it is expected that sales will decrease by 0.6% during the month. Observe the USD/CAD trends.

EUR - Euro

Despite the USD's efforts to gain strength, the EUR has remained relatively robust. The initial PMI data for April in the Eurozone showed mixed results, as the manufacturing activities in France and Germany weakened. However, there was much better-than-anticipated growth reflected in both the services and composite data. The Composite PMI for the Eurozone increased to 54.4, surpassing the anticipated 53.7, indicating that growth might be gaining further momentum, thereby supporting the expectations of additional rate hikes by the ECB in the future.

GBP - British Pound

The GBP has shown some weakness against both the USD and EUR after a series of mixed data reports from the UK. In March, Retail Sales fell more than anticipated at 0.9% month-over-month. However, the preliminary PMI data for April, mostly positive, showed that while manufacturing activity has softened, both Services and Composite data were considerably better than expected. This suggests that growth momentum is slowly picking up in the UK, supporting the outlook for more tightening by the BoE in the upcoming months.