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Growth worries

View from the Trading Desk:

The US Dollar’s dominance over the past couple of months has been hard to ignore. Propelled by the Federal Reserve’s aggressive stance on tackling inflation and both political and economic uncertainty elsewhere, it’s perhaps unsurprising that the latest chatter is now centred around the Greenback strengthening beyond parity against the Euro. Last week, the pair touched a five-year low, breaching the 1.04 handle for the first time since January 2017, and this morning’s European Commission projections will do little to aid Euro bulls. The EC downgraded growth forecasts for this year from 4% in February to 2.7%, while the 2023 number is down from 2.7% to 2.3%, with the Russian invasion of Ukraine cited as the main reason for slowing GDP.

Looking further afield, the effects of China’s zero-Covid policy became more evident over the weekend, as industrial output and Retail Sales both fell to their worst levels since the beginning of the pandemic. A slowdown in Chinese manufacturing will further impact global supply chains—which are already affected by the Russia-Ukraine war—worsening the outlook for global growth and causing more pain on the inflation front.

As far as the European Central bank is concerned, there’s a real risk that Euro weakness will become a significant driver of imported inflation. Bank of France Governor Francois Villeroy de Galhau commented that policymakers are watching the foreign exchange market, wary that a Euro that's too weak would go against price stability objectives. In all likelihood, ECB President Christine Lagarde will use her speech this week to reiterate the bank’s positioning on a weak Euro, potentially supporting the currency from taking another leg lower.


The week ahead


Sterling has had a muted start to the week against the other G10 currencies, trading just above a two-year low against the US Dollar and 40 basis points lower against the Euro. Consensus for further Sterling weakness is building as a cocktail of slowing growth, rising prices, and a central bank wedged into a path of tighter monetary policy appears to offer little near-term support. According to the recent MLIV Pulse survey, the majority of respondents expect Cable to be trading closer to $1.15 in the coming months as Brexit tensions build in an already challenging environment. UK Prime Minister Boris Johnson is expected to take unilateral action to scrap parts of the Northern Ireland protocol this week, with an EU trade war a possibility.  

  • Bank of England Monetary Policy Report Hearings are scheduled to take place today at 3:15PM.
  • Monetary Policy Committee members Jon Cunliffe and Huw Pill are due to speak this week.
  • UK Consumer Price Index y/y is expected to hit 9.1% in April, up from 7.0% in March.
  • Retail Sales m/m for April will be published on Friday. Analysts are expecting a print of 0.2% versus -1.4% in March.



The Euro moved higher this morning as the European Central Bank released revised inflation projections upward to 6.1% for 2022. This has given some support for a more hawkish monetary policy from the ECB in its next meeting, with markets pricing in around 94 basis points of hikes in 2022. Yet another governing council member has voiced support for higher rates; Pablo Hernández de Cos is expecting interest rates to rise ‘very soon’ in the bloc. Bets on EUR/USD hitting parity have swelled to $7bn in the last month as hedge funds forecast further downside for the pair. European stock markets are trading relatively mixed today while European sovereign yields have moved higher.

  • European Central Bank President Christine Lagarde is due to speak tomorrow at 6:00PM.
  • European Central Bank Monetary Policy Meeting Accounts are scheduled for release on Thursday.
  • German Producer Price Index m/m for April is expected to read 1.4% versus 4.9% in March.
  • Eurozone Consumer Confidence will be published this Friday, with analysts forecasting a print of -21.



Momentum for the US Dollar has taken a pause heading into the week, with the DXY trading flat to kick off the first trading session. The Greenback closed higher yet again last week, marking six straight weeks of gains as consumer sentiment fell to its lowest levels since 2011. Federal Reserve member Loretta Mester has backed 50 basis-point rate hikes in both the June and July meetings. Mester also emphasised that consecutive months of inflation declines would be needed to conclude that prices are stabilizing, indicating that aggressive tightening could continue for some time. US Treasury yields are mostly higher this morning; the 10-year is trading just above 2.9%, while US stock market futures point lower.

  • Federal Open Market Committee members James Bullard and Loretta Mester are due to speak this week.
  • US Retail and Core Retail Sales m/m for April are forecast at 1.1% and 0.3%, respectively.
  • Federal Reserve Chairman Jerome Powell will be speaking tomorrow at 7:00PM at the Wall Street Journal’s Future of Everything Festival. 
  • US Unemployment Claims for the week ending the 14th of May are due to be released on Thursday, with a 200K print expected.


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