Markets will be closely following the FOMC’s meeting on 2 May, even with no policy change is expected. Given upside surprises to US core CPI and PCE inflation since the March FOMC, the Fed will have to acknowledge slower progress in returning inflation back to the 2% target. As such, guidance could change towards a greater focus on lowering inflation and lesser rate cuts than the three cuts in the March dot-plot, while keeping alive prospects of a 2H rate cut given a growth slowdown. With the Fed likely to veer away from near-term cuts, the USD should bump higher into FOMC, barring surprises from ISM and ADP. Post-FOMC, non-farm payrolls pose yet another critical data point, and markets will watch if labour market strength could ease enough for 2H rate cuts.
Besides FOMC and NFP, EUR/USD will be driven by key European data, with the Eurozone announcing CPI for Apr and Q1 GDP on 30 Apr. Core inflation in the Eurozone has been on a steady downward trajectory and is expected to slip to 2.6% y/y for Apr (Mar: 2.9%). Softer inflation and tepid Q1 growth should reinforce the case for an ECB rate cut on 6 June. As markets have priced in a near 90% chance of an ECB cut in June, EUR/USD dips below 1.07 may be shallow without a strong USD follow through post-FOMC.
The JPY has depreciated sharply post-BOJ even without any new announcements, evident from the small easing of 2Y and 10Y JGB yields by just 1bps. Markets (and us) have given much credence to the risk of FX intervention with the context of a trilateral agreement underscoring concerns of JPY weakness, and an unmoved BOJ ahead of the start of Japan’s Golden Week when Tokyo trading desks are less well staffed. Therefore, a lack of intervention was enough to precipitate more forceful shorts and drive a large JPY decline. But with thin liquidity and reduced resident supply in the Golden Week holidays, USD/JPY upward momentum may slow. Historically, USD/JPY trades with lesser volatility during the Golden Week, with only 1 out of the last 10 years seeing a weekly return of more than 1%, and the average weekly return being just -0.2%.
USD/CNH could only see limited strength even with a firmer USD post-FOMC, given that the onshore USD/CNY fixing should be kept around 7.10, while China is also out for holidays starting 1 May. JPY weakness is also not necessarily a big concern for China, given the different stages of supply chains occupied by Chinese firms compared to Japanese firms. Moreover, despite the soaring CNY/JPY rate, foreign equity investor sentiment towards China has improved noticeably in recent weeks. Investor positivity could be further reinforced if China’s manufacturing PMI for April stays above the expansionary zone.
AUD has been the standout performer in G10 last week with a 1.8% gain, as concerns over Australia’s sticky inflation build. Private sector credit growth for Mar could surprise on the upside this week, with Australian home prices setting a record high for the fifth consecutive month in March. Iron ore prices have also climbed supported by Chinese stimulus and new subsidies for Chinese consumers to scrap old cars and buy new ones. The AUD rally could pick up if RBA rate hike odds shorten, with EUR/AUD most likely to ease further amid prospects of ECB-RBA policy divergence.
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