Yesterday, the USD initially seemed poised to dip but instead rose to a 10-day high. This morning, the USD is slightly softer, though strong data continues to support it through higher US yields and reduced expectations of Fed rate cuts. Unless spreads shift further in the USD's favor, its gains might slow or stall. European stocks are down following sharp declines in US markets, but US futures are positive. Bonds are slightly firmer, and WTI is lower. Today's data includes Durable Goods, expected to decrease in April, and the final U. Michigan Sentiment data at 10 ET.
The rise in US rates yesterday widened key spreads by 5-6bps, increasing the 2Y yield gap in favour of the USD by around 10bps over the past week. These spreads are influencing the CAD. Spot gains are above our fair value estimate for CAD (1.3640), but market focus on the Fed rate outlook might overshadow this. Canadian Retail Sales are forecasted to drop 0.1% in March, with ex-autos expected to rise by 0.3%. Weak headline data could suggest high rates impact consumers, making a BoC rate cut more likely than a Fed cut in the coming months. Observe the USD/CAD trend.
The EUR is mildly higher today, with dips to the low 1.08 area attracting buyers. ECB policymakers signal rate cuts starting in June, and markets expect the ECB to be the most accommodative major central bank this year, with over two 25bps hikes currently anticipated. ECB hawks agree with the June start but favour a cautious approach, suggesting the likelihood of two cuts this year instead of three.
UK Retail Sales fell 2.3% in April, much worse than the 0.5% forecast, possibly due to weather and an early Easter. Despite a brief dip below 1.27, the pound rebounded as investors looked past the weak headline data. Volume sales rose 0.7% in the April quarter. This week's higher-than-expected CPI and the snap election call reduce the risk of a late June BoE rate cut, supporting the GBP for now.
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