EM Market Report

You can go your own way…

Thanim Islam
Thanim Islam 04 May 2023

- USD continues to slide

- Fed rate expectations head lower

- Next up – the ECB


Data from the US was rather mixed yesterday, but USD continued to weaken ahead of the evening's Fed meeting as rate expectations continued to diverge. The ADP payroll number came in higher than expected, as did the ISM services number, but the S&P services and composite numbers and ISM prices paid came in lower, taking US treasuries and the USD lower. GBPUSD and EURUSD traded near recent highs once again. The unemployment rate in Europe dropped to 6.5% also, which was better than expected.

The evening's Fed meeting didn’t create any major fireworks, with the Fed hiking by 0.25% and the accompanying rate statement falling in line with expectations. The Fed's stance will now be one of data dependence versus previously stating that more hikes may be needed. So a pause in June could be on the cards. The net effect is yields on US treasuries declining, and the market increasing the amount of rate cuts expected by the end of the year. Prior to the Fed meeting, approximately 0.45% worth of cuts were expected, and current pricing suggests 0.80% worth of rate cuts. The USD continued to weaken with GBPUSD and EURUSD attempting new highs.


Market rates

* Daily move - against G10 rates at 5:00pm, 03.05.23

** Indicative rates - interbank rates at 5:00pm, 03.05.23

Table (2)-1

Data points

Table (3)-1


  • EUR - ECB Lagarde

Our thoughts

Over to the ECB today. Markets are largely expecting a 0.25% rate hike today with a 16% chance of a 0.50% hike. Shifting down to 0.25% hikes would signal a slow down in the ECB’s aggressive rate hike cycle that started last July, which saw four 0.50% rate hikes and two 0.75% rate hikes. Could this be a signal for the markets that we are near peak ECB rates, and thus signal near the top of the EUR strength? More importantly, for the sake of further EUR strength, we would need hawkish tones in the accompanying rate statement. However, as mentioned in yesterday's report, some regional banks in Europe curbed lending in the first quarter of this year due higher borrowing costs. So perhaps we could see some hesitancy from the ECB to keep hiking rates, i.e. a dovish tone. If so, then we could see some weakness in the EUR.

UK PMIs will also be out this morning, and anything to suggest that the UK continues to perform better than expected will continue to add to the exuberance we have seen in GBP pairs recently, particularly ahead of the BoE meeting next week. Given data dependency from the Fed, tomorrow's US job numbers will be key, as ever, for USD performance.

Chart of the day

Following last night's Fed meeting the markets were quick to add to rate cutting bets by the Fed by the end of the year, whilst keeping BoE rate expectations near 0.60% worth of hikes. The spread between the two central banks' rate expectations has now widened to a difference of 1.37%, which is keeping GBPUSD elevated near the June 2022 highs. We have US job numbers tomorrow, and given the Fed preferring to be data dependent this is a risk factor that could narrow this spread. And of course, next week's BoE meeting is also a risk factor. Any pushback by Governor Bailey et al, which goes against market expectations for rate hikes could narrow this spread and bring GBPUSD lower with it. For now, the markets perception of Fed rate expectations seem to be going one way, but could the same happen following the BoE meeting?

04052023 cotdSource: Bloomberg Finance L.P.

Have a great day.