The dollar is retreating and Treasury yields are slipping as geopolitical tensions ease and traders shift focus toward more prosaic market drivers. After a weekend in which Israel and Iran refrained from further escalation, North American equity indices are setting up for a positive open, oil and safe-haven gold prices are heading lower, and a range of major currencies are inching higher against the greenback. With Federal Reserve officials entering their pre-decision blackout period, corporate earnings releases, government bond auctions, and a series of economic data releases look likely to take centre stage in driving foreign exchange outcomes through the week ahead.
Somewhat unusually, we don’t think Friday’s inflation data will prove terribly critical. Although surprises are possible, estimates derived from previously-released consumer and producer price data show the Fed’s preferred inflation measure – the core personal consumption expenditures index – rising 0.3 percent month over month in March, matching the pace seen in the prior month, and bringing the year over year change down to 2.7 percent from 2.8 prior. This remains too strong for the central bank’s comfort, and should keep rate cuts at bay for months to come, but markets have likely already absorbed this information, meaning that the impact on rates should be relatively minimal.
Instead, markets might glean more information from the slew of purchasing manager indices set for release over the next few days, as well as Thursday’s first-quarter US gross domestic product report.
March survey data showed the world economy undergoing a modest acceleration, with a weighted average of composite purchasing manager indices hitting its fastest pace since last June. S&P Global’s activity measures showed growth becoming more broad-based and sectorally-balanced, with both manufacturing and services indices posting a fifth consecutive improvement, suggesting that the Fed’s “pivot” in October – and the associated easing in financial conditions – was translating into a wider rebound. The UK, US, and Japan saw continued gains, the euro area moved into expansionary territory for the first time since last May, and the Canadian economy remained the only major-economy laggard, with output dropping for a tenth month. If this growth continues in April, the case for moving cash out of the US – and into cheaply-valued assets elsewhere – could grow stronger.
Major uncertainties exist around Thursday’s US gross domestic product number. Although higher interest rates took a toll on business investment in the first quarter, this was likely offset by wealth effects, strong labour markets, and an increased willingness to take on debt, with residential investment, consumer spending, and inventories all likely to show signs of continued expansion. Economist estimates are all over the map, with forecasts landing between 2.2 percent and 3.1 percent, while the Atlanta Fed’s GDPNow model points to a 2.9 percent pace for the quarter. Anything in this range might represent a slowdown from the 3.4-percent pace set in the last quarter of 2023, but would be far faster than most observers had anticipated a few months ago – and would tie into the massive improvement in expectations that propelled the greenback higher in recent months. Alternatively, a disappointment could push foreign exchange markets toward the bottom of the “dollar smile”, with narrowing growth differentials helping to support currencies elsewhere.
