The Week Ahead Anticipating a Weaker USD and a Stronger EUR

This week, I’m keeping a close watch on a range of important economic data from the US, along with key updates from Europe. In the US, key highlights include the ISM Survey yesterday coming in much lower than what was expected by the consensus dragging the USD down to 104.080, ADP Employment Change and Factory Orders on Wednesday, Durable Goods Orders and Weekly Initial Jobless Claims on Thursday, and Nonfarm Payrolls and the Unemployment Rate on Friday. Last month, jobless claims rose slightly to 219k, surpassing Bloomberg's consensus of 217k, and negative hiring intentions from regional FED surveys and the FED's Beige Book indicated reduced hiring expectations. These reports will be crucial in assessing the labour market's current state, especially as we look for signs of a cooling labour market.

USD Index 

 Source: Finlogix Charts In Europe, the focus will be on the ECB meeting on Thursday, where rate cuts are expected, reflecting a dovish shift even among its hawkish members. Additionally, the final Q1 GDP data for the eurozone will be released on Thursday, and eurozone PMI on Friday will be key to understanding the region's economic performance.

Key themes and market implications include the US labour market, where any significant deviations in jobless claims, nonfarm payrolls, or the unemployment rate could influence the Fed's policy outlook. Last month’s core PCE inflation dropped to 0.25% month-on-month in April from 0.33% in March, leading to a 5-basis point decline in both 2-year and 10-year yields. This week’s data will be crucial in confirming whether this trend continues. Additionally, declines in goods spending and modest growth in services consumption indicate potential vulnerabilities in consumer spending.

The anticipated ECB rate cut, and the subsequent policy direction will be closely monitored. The path forward post-initial cut remains uncertain and could impact EUR/USD dynamics. Our fund maintains short positions in EUR and long positions in USD, based on expectations of divergent monetary policies between the ECB and the Fed. With the ECB likely to begin cutting rates and the Fed requiring more favourable inflation data and weaker jobs data before considering rate cuts, we anticipate the euro to weaken against the dollar. The USD positions are also supported by the relative strength of the US economy and the possibility of a more hawkish stance from the Fed if inflation data does not continue to improve. By the end of the week, we should have a clearer picture of the labour market's health, inflation trends, and central banks' policy directions, providing critical insights for our positioning and strategy moving forward.

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