Daily Currency Update

USD - US Dollar

There's significant anticipation for tomorrow's release of the US March core PCE data, the Federal Reserve's preferred inflation indicator, expected to show a 0.3% month-on-month increase. If confirmed, this would counter the Fed's narrative of disinflation and suggest limited scope for monetary easing in 2024, with only 41 basis points anticipated. Today's release of the first quarter 2024 core PCE deflator, expected at 3.4% on a quarterly annualized basis, will offer insights into tomorrow’s data. A 3.42% increase suggests a 0.3% month-on-month rate for March; 3.40% implies a 0.2% increase, while 3.55% could indicate a concerning 0.4% rise, possibly leading to a bearish flattening of the US yield curve and strengthening the dollar. This data release could significantly affect the market, highlighting the vulnerability of the dollar's position. A 0.4% month-on-month result could lower Fed easing expectations to just 25 basis points, potentially driving the DXY to levels between 106.50 and 107.00.

CAD - Canadian Dollar

The CAD is experiencing a slight recovery, currently trading near 1.3670, despite a general dampening of risk appetite that usually favors the USD. The loonie's gains, however, were limited following disappointing Retail Sales data, which has increased expectations of a potential interest rate cut by the Bank of Canada in June. Moreover, declining crude oil prices are putting additional pressure on the CAD. Observe the USD/CAD exchange rate.

EUR - Euro

EUR/USD has stabilized this week amid slightly calmer geopolitical conditions and signs of growth in the Eurozone. Interestingly, a June rate cut from the European Central Bank is not yet fully anticipated, with only a 73% probability, as the ECB carefully manages communications about post-June policy. Today, EUR/USD's movement hinges on US data releases. Currently at 1.0710, the pair might stall, but a break above 1.0725/45 (if US data is weaker than expected) would necessitate a reassessment of the potential drop to 1.05 in the near term.

GBP - British Pound

Just as sterling seemed poised for a significant drop earlier this week, comments from Bank of England Chief Economist Huw Pill dampened the momentum, leaving the market uncertain about the future direction of the UK MPC committee. We still favor a weaker sterling this year given the high 5.25% policy rate and the economy's negative output gap, but the timing of this sell-off is now less clear. The likelihood of a major communication shift by the BoE at the May 9 meeting appears reduced following Pill's remarks.