We expect communication by ECB speakers in Sintra to broadly endorse expectations for another hike this year after Lagarde’s measured opening remarks. The dollar has continued to hand back some gains, with focus on data today ahead of Warsh’s Sintra speech tomorrow, which is expected to be hawkish. remains in FX intervention territory
USD: Momentum Keeps Fading Into Key Data and Warsh
The dollar has continued to hand back recent gains against most G10 currencies, largely thanks to a recovery in equities. Added support for risk sentiment has come from news that the US and Iran will start a new round of negotiations despite weekend skirmishes. This second factor, however, seems to be weighing on oil currencies (the Australian dollar, Canadian dollar, and Norwegian krone), which are lagging alongside the yen (more below). Still, we discuss here how the oil drop looks overdone, and we still expect gains in AUD and NOK this summer as moderately higher energy prices pair with attractive carry.
Focus today turns to US data. Our macro team looks for a well above-consensus 97.5 print in (vs 94.5), supporting the narrative of resilient spending. By contrast, openings should fall in May, with our forecast at 7.25m against a 7.3m consensus. This should not materially challenge the signal of a healthy labour market, particularly with the vacancies-to-unemployed ratio remaining above 1.0.
Overall, we see a neutral to moderately positive impact on the dollar from today’s data. But USD bullish momentum has clearly faded, and improved risk sentiment argues against another sharp leg higher for now, at least until Fed Chair Kevin Warsh’s Sintra speech tomorrow and Thursday’s jobs data provide clearer direction.
EUR: Sintra Unlikely to Rock the Euro
We argued yesterday that ECB President Christine Lagarde didn’t look likely to use Sintra for a radical change in policy communication. And indeed her opening remarks yesterday were quite measured. She said that the ECB response doesn’t need to be as forceful as it was in 2022-2023, but also that the economy has grown resilient.
There is little here to prompt markets to revise expectations for another hike this year. We expect other ECB speakers this week to broadly validate that pricing, even as yesterday’s eurozone sentiment indicator showed signs of easing inflationary pressures.
flash estimates for June are being published this week in the eurozone. Spain surprised to the upside at 3.2% yesterday, while France is expected to slow from 2.4% to 2.0% this morning. Germany reports at 1:00 pm CEST, with consensus for an unchanged 2.6%. Taken together, we do not expect a material impact on the euro.
We acknowledge downside risks for ahead of US data and Warsh’s speech in Sintra, but remain more in favour of stabilisation around or just above 1.140 rather than a retesting of last week’s lows in the coming days.
JPY: Into the Intervention Zone
USD/JPY continues to grind higher, raising fears of another round of FX intervention by Japanese authorities. Recall that the Bank of Japan sold around $70bn of dollars in late April/early May when USD/JPY was starting to trade above 160. While 162 is widely seen as another ‘line in the sand’ (marking the 2024 high), Tokyo may prefer to hold off intervention until Friday’s US holiday-thinned market conditions. At the same time, the market will have already had a chance to react to both comments from Warsh on Wednesday and Thursday’s US jobs report.
There is also a chance Tokyo holds out until shortly before the next Japanese public holiday – if it was to repeat the pattern from 2024. That would point to the 16-17 July window ahead of the Marine Day holiday on the 20th. Nonetheless, Japanese authorities will appreciate that intervention can only try to slow, not reverse, the current USD/JPY bull trend. A reversal would require not only some dramatic BoJ rate hikes, but also a turn in the broad dollar trend – the latter something for much later in the year once current Fed hawkishness has run its course.
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