The US dollar is showing some resilience during the recent trading session as it reclaimed some ground lost in the previous week’s sell-off.
On the other hand, equities are maintaining stability, supported by various technical factors such as CTA flow, buybacks, and vol compression. However, the fervour to chase last week’s rally seems to have waned, reflecting a cautious sentiment among investors.
The US 10-year auction exhibited tepid demand, nudging US 10-year yields back up to 4.5% at the close. With a 30-year auction looming in the evening, the USD is gradually recuperating some of its early May losses, with the DXY breaking the 105.30 this morning, primarily fuelled by USDJPY’s upward momentum, closely tracking US yields.
Looking ahead, all eyes are on the Bank of England (BoE), although no rate change is anticipated at this juncture. Market attention will be honed on three crucial aspects of communication to gauge the likelihood of a move in June: updated projections, vote split, and guidance wording. While formal policy guidance is expected to remain largely unchanged, Governor Bailey’s indication of rising confidence in the inflation outlook and the significance of near-term data will be pivotal in determining the timing of the first rate cut.
Considering recent dovish commentary from Ramsden and Bailey, any further dovish signals today could reignite interest in GBP downside, while positioning in both currency and rates markets remains susceptible to shifts in sentiment.
The BoE’s decision to maintain rates underscores its cautious optimism, yet the absence of a clear endorsement for a June rate cut suggests a nuanced approach. With inflation readings and market rate expectations shaping future moves, the debate between a June or August rate cut remains finely balanced.
However, the Bank’s comfort with current market pricing for two rate cuts this year indicates a gradual but deliberate approach to monetary policy adjustments.
As an extra voter opts for a rate cut, short-dated rates witness a slight downward adjustment, signalling growing support for immediate action. While the vote split may not conclusively predict future decisions, the Bank’s incremental shift towards a rate cut reflects its evolving stance amidst economic uncertainties.
In essence, while the Bank of England inches towards a rate cut, it maintains flexibility, with the June versus August trajectory contingent on forthcoming inflation data. As the debate unfolds, the market braces for potential volatility, while our base case remains tilted towards an August rate adjustment.
Market commentary and analysis from Luca Santos, currency analyst at ACY Securities
