The US dollar is edging lower as risk appetite recovers from a surprisingly-hawkish set of Fed minutes. The greenback surged yesterday afternoon after a record of the Federal Reserve’s last meeting showed officials expressing doubts over whether interest rates were tight enough to bring inflation down to target, weighing on rate cut expectations across the front of the curve. According to the minutes, although policymakers generally thought the central bank was “well positioned,” there were “many” who felt “uncertainty about the degree of restrictiveness” being imposed on the economy. “Various participants mentioned a willingness to tighten policy further should risks to inflation materialise in a way that such an action became appropriate,” the minutes said, suggesting that June’s “dot plot” summary of economic projections could see a substantial rise in the median estimate for year-end interest rates.

The effect was swiftly unwound after the North American close when artificial intelligence chipmaker Nvidia released revenue numbers that topped already-lofty expectations, sending share prices higher and helping boost asset prices globally. The company forecast second-quarter revenue of some $28 billion, almost $2 billion above estimates, and added almost $140 billion to its capitalisation in pre-market trading. High-beta currencies like the Nokkie, Stockie, kiwi, loonie, and Aussie all unwound their losses relative to the dollar, with their performance roughly aligned with indebtedness levels as traders continued to bet against economies with high interest rate sensitivities. To wit, according to numbers from the Bank of International Settlement, the ratio of household credit to gross domestic product was sitting at 81.6 percent in Norway, 85.1 percent in Sweden, 91.9 percent in New Zealand, 103.2 percent in Canada, and 111.1 percent in Australia, as of the second quarter in 2023.

The British pound looks broadly untroubled by Rishi Sunak’s decision to call a general election on American Brexit Day. With Keir Starmer’s Labour party consistently more than 20 points ahead of the Conservatives in polls, the exchange rate barely budged and implied volatility levels inched almost-imperceptibly higher when the Prime Minister said a vote would be held on July 4. Market participants expect Starmer to govern from the centre, forging closer ties with the euro area and avoiding the sort of fiscal experimentation that helped a supermarket lettuce outlast the Liz Truss government in 2022. Sterling is holding just below a two-month high against the dollar, but this is mostly attributable to Tuesday’s hotter-than-expected inflation print playing a supportive role in narrowing rate differentials relative to the US.

Business activity in the euro area accelerated this month, helping boost the common currency’s value in early trading this morning. S&P Global’s preliminary composite Purchasing Managers’ Index climbed to 52.3 from April’s 51.7, topping market expectations as the services component held steady and the manufacturing sector showed clear signs of pulling out of its slump, with the sub-index jumping to a 15-month high at 47.4, up from 45.7 in the prior month. Separate data from the European Central Bank showed wage growth rising 4.7 percent year over year in the first quarter, up from 4.5 percent in the last quarter of 2023. The central bank is highly likely to deliver a well-telegraphed rate cut when it meets in two weeks, but with markets currently priced for two additional moves before the end of the year, the euro looks vulnerable to a topside move.

The People’s Bank of China incrementally lowered the “fix” – the exchange rate that serves as a midpoint for the yuan’s trading range – last night, suggesting that authorities are growing more comfortable with slow-walking the currency’s depreciation. The renminbi has drifted lower for months as wide rate differentials have lifted the greenback against most of its rivals, as the Chinese economy has slowed, and as capital outflows have grown stronger – but the central bank’s stranglehold on the conversion channel has placed strict limits on losses. We suspect that the government wishes to avoid a repeat of the 2015 devaluation – which triggered widespread capital flight, leading to an uncontrolled descent in the exchange rate and in financial markets more broadly – but also sees advantages in more closely pacing the declines seen in other Asian currencies.

The day ahead is littered with second-tier data releases. The US will drop its latest jobless claims number, which could garner greater-than-normal interest in markets, given that the data was collected in the same survey week as the May non-farm payrolls report. The Chicago Fed’s National Activity Index will hit simultaneously, and S&P Global’s US purchasing manager indices will follow later in the morning, helping to confirm the extent to which the growth momentum baton is moving across the Atlantic to the UK and euro area.