Next week’s CPI print (expected to come in above 8% y/y) will likely add to Fed hawkishness and set the dollar on another leg higher, reflecting a broadly bullish technical tone for the DXY after breaking out of the consolidation range which prevailed through March. Risk sentiment is, however, constructive, with European stocks up strongly and US equity futures positive. Crude oil is firmer while major bond markets are flat to slightly softer. Elevated US yields (2s holding near this week’s high and 10s rising to 2.67%, the highest in more than three years) remain important props for the USD. The week is closing out quietly with the release of Canadian jobs as the only notable item on the calendar through the rest of the day; there are no Fed speakers on tap and US wholesale inventories/sales at 8.30ET should not move markets.
Sterling reached a three-week-low overnight, with a 0.2/3% decline on the day following the broad dollar-positive mood. Despite today’s losses, the GBP managed to outperform most its major peers this week, falling by 0.5% since last Friday, or a third of the EUR’s decline of 1.5% over the period. Domestic GBP drivers were few and far in between in the past few days, but next week brings payrolls and inflation data that will likely trigger some repricing of BoE hike expectations. However, the data may see expectations priced even higher—i.e. in the opposite direction of where we think market pricing should go. We maintain a cautious outlook on the GBP ahead of the BoE’s policy decision in early-May, where its new MPR forecasts will probably show an undershooting of inflation under the policy rates expected by markets—and implicitly push back against hawkish expectations. While next week’s data may build a cushion above the 1.30 level in the GBP, we think the currency remains at risk of a decline under the figure as the BoE disappoints markets.
