Global markets are bracing for a potential storm in June as major central bank meetings could result in sharp policy divergences, significantly impacting market conditions. This divergence might reignite the volatility that shook the market in April.
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US inflation, interest rates, and the Federal Reserve
US inflation remains a significant concern, with solid readings from the latest US activity data, such as purchasing manager indexes (PMI), which suggests a resilient economy. Additionally, stronger-than-expected wage growth has contributed to the solid readings from the latest US activity data. Consequently, money markets have pushed back expectations for Federal Reserve (Fed) rate cuts. This month’s Fed meeting will be crucial for setting expectations, as a more cautious Fed could see the US dollar strengthen, impacting global trade and investment strategies.
European Central Bank and Bank of Canada
In contrast, inflation is falling in other regions. This month’s European Central Bank (ECB) and Bank of Canada (BoC) meetings could see these central banks ready to cut rates. If they move to ease monetary policy, the euro and Canadian dollar could face downward pressure. This divergence in policy may increase fx volatility, making it essential for businesses involved in cross-border trade to stay informed.
Disinflation has slowed
Fed communications have been hawkish this month, influenced by a reflationary first quarter. The impact of services inflation has also been a factor in the Fed’s hawkish communications. While rate hikes are off the table for now, the Fed is not expected to ease policy until Q3. Inflation rates are coming down globally, but the pace has slowed, and the goods side of the economy has begun to reflate again. The risk of declaring a premature victory against inflation is on the increase, leading policymakers to push back against speculations of early easing and a rate cut.
US economy showing cracks in Q2
The US economy, a standout performer in the post-pandemic era, is beginning to show signs of strain. Recent data disappointments, such as lower purchasing manager indicators and small business confidence hitting an 11-year low, suggest cracks are beginning to show in the US narrative. Retail sales and industrial production stagnated in April, ending a two-month growth streak, and job growth slowed to the lowest level this year at 175,000. These indicators could weigh on the US dollar, and as the dollar falls, it may influence global currency markets and associated risks.
Equity markets leap as China comes back
The equities market in the US and European equities have continued to rise every month bar one since November, supported by central banks cutting interest rates. Despite the slowdown in disinflation, higher yields have supported risk assets in May, with the US dollar remaining defensive. Inflation is expected to trend lower in most countries, keeping earnings resilient. This has supported risk assets in May, with the US dollar remaining defensive. Chinese equities soared as speculations of policy support brought back buyers.
Setting the Scene Before Summer
The big three central banks in Europe and the US are set to meet this month, with only one expected to begin its long-awaited easing cycle. The second half of the year could see further policy changes as central banks respond to evolving economic conditions, something the market will watch for. The ECB is almost pre-committed to cutting interest rates by 25 basis points in June, the first easing in four-and-a-half years. The market will closely watch economic projections published on the day of the rate decision to gauge the likelihood of further cuts in July.
Inflation surprises in the UK and US have delayed speculative bets from the market on the Fed and Bank of England easing policy in June. However, the Fed’s Summary of Economic Projections could provide clues on how it views inflation, growth, and rates over the next 12 months. Meanwhile, the central banks of Sweden and Switzerland, which initiated the European easing cycle, are expected to hold policy steady at their next meetings.
In Canada, the market leans towards a rate cut by the central bank in June. However, the BoC might choose to wait for additional data on CPI, GDP, and jobs before easing policy in July. This cautious approach highlights the importance of timely economic data in shaping monetary policy decisions.
British Pound strength in May
The British pound appreciated against 80% of its global peers in May, its best monthly performance since October 2022 when it rebounded from record lows against the US dollar after the UK mini-budget crisis under former PM, Liz Truss.
Supporting the British pound of late has been the hawkish repricing of BoE rate expectations after UK services inflation came in at 5.9%, above the 5.5% forecast, which gave the pound a big boost across the board amid UK gilt yields rising to two-month highs.
Euro volatility normalizes
The euro was strong in May, appreciating against 65% of its peers in May, up from 43% in the previous month – its second-best monthly performance in 2024. Despite BoJ intervention at the beginning of May, EUR/JPY continues to climb and has gained over 0.3% in the past 30 days. One-month euro realized volatility against the Japanese yen remains the highest across the basket of its G10 peers, but admittedly has cooled substantially from mid-month highs.
Meanwhile, EUR/CHF climbed past the CHF0.9900 barrier – a 14- month high, largely due to a back-up in eurozone swap rates, where two-year rates have risen 60bps since January. The widening swap differential has pushed EUR/CHF within 1% from parity.
Stay informed with the latest market commentary
As we move through June, keep a close watch on the Fed, ECB, and BoC, whose actions and communications around rate cuts will have significant implications for major currencies, and emerging market currencies. Their decisions will shape the global economic landscape and impact the fx market, influencing the strategies of businesses worldwide.
For any businesses managing finance or operations in an international market, understanding these global trends and events in currency markets is crucial for managing risks and seizing opportunities in cross-border trade. Market volatility can have significant implications for international payments, pricing strategies, and overall finances.
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