Post date: 23/04/2019 08:30
Easter week is typically one of the slowest trading weeks of the year in currency markets, and last week was no exception. G10 currencies stayed within 0.5% of each other with the sole exception of the New Zealand dollar, hurt by weaker than expected quarterly inflation and the increasing market conviction that the next interest rate move will be a cut. Aside from G10, major emerging market currencies trade a bit on the weaker side for the most part but without much conviction.
Next week is set to be a sluggish return from holidays, with relatively few key releases. US first-quarter growth out on Friday will be the main focus for FX markets, aside from any Brexit headlines that the return of Parliament to political activity may generate.
The punting of the Brexit decision into the future enables us to focus once again on UK economic fundamentals. The news last week confirmed that the UK is performing like the most developed market. A healthy labour market is creating jobs and generating substantial wage gains, but this has yet to translate into meaningful inflationary pressures, as core inflation measures stay at or below central bank targets. This, combined with Brexit uncertainty, means the Bank of England is likely to sit out the next few months, much like its G10 peers. However, the pound remains cheap to most measures and we maintain a positive outlook for the next few quarters.
PMI business activity numbers out last week were a slight disappointment, pulling back modestly even while the composite index remained in expansionary territory. The rebound in Chinese factory activity has not yet resulted into a meaningful uptick in manufacturing sentiment in the Eurozone. The common currency seemed to take it in stride and ended the week essentially were it had begun in tepid holiday trading.
We had mixed signals on the health of the US economy last week. Whereas retail sales for March blew away expectations, housing market data disappointed. However, the recent pull back in interest rates after the Federal Reserve announced it’s done hiking interest rates for now should support the housing sector over the medium term and we are not particularly concerned here. Friday’s advanced report on first quarter world will provide a meaningful test of our moderately optimistic view.