Rates, Repricing, and Resilience.

• USD vs. Global Rates: Despite rising USD swap rates, the dollar struggles as risk sentiment remains resilient and G10 rate expectations stay tied to Fed pricing.
• EUR: ECB’s Influence: The ECB’s hint at a potential June cut could drive a correction in the EUR/USD pair, with short-term risks favoring a dip below 1.08.
• GBP’s Steady Stance: GBP/USD maintains positivity, bolstered by strong UK retail sales, but faces potential volatility ahead of GDP and factory data releases.
• Riksbank’s Role: Riksbank’s rate cut expectations diminish, reflecting market recognition of the krona’s impact, with SEK’s short-term fragility offset by upside risks for EUR/SEK.
• Market Expectations: BoE’s potential rate reductions from June gain traction amidst easing price pressures, shaping the trajectory of GBP.

USD vs. Global Rates: A Divergence Game

Since Friday’s US jobs report, the relationship between short-term rates and the dollar has taken an unexpected turn. Despite the 2-year USD swap rate hitting 4.67%, its highest since November, the dollar isn’t reaping the benefits as anticipated. This divergence can be attributed to two main factors. Firstly, the hawkish repricing in Fed rate expectations hasn’t negatively impacted risk sentiment, contrary to conventional wisdom. Secondly, G10 rate expectations seem overly reliant on Fed pricing, disregarding differing domestic economic narratives.

In Canada, for instance, despite economic setbacks, rate cut expectations align closely with the Fed’s timeline. Similarly, despite disappointing eurozone inflation data, ECB easing expectations have diminished only marginally. While a case for a stronger dollar seems evident in the short term, a substantial rally might be delayed until the gap between Fed policy and that of other developed central banks widens further.

Upcoming dovish messages from the Bank of Canada and the ECB might trigger a rotation back to the greenback, though. Additionally, the US CPI release looms as a significant risk event for the dollar. If core inflation aligns with consensus, expectations of a dovish Fed repricing could diminish further. However, today’s focus remains on the NFIB small business optimism index.

EUR: ECB’s Hint Sparks Euro Correction

The European Central Bank signaling a potential June cut could serve as a catalyst for a correction in the EUR/USD pair. Short-term risks appear tilted towards a decline below 1.08 post-ECB. While the eurozone’s ECB lending survey is today’s only data release, market confidence in monetary easing’s path and timing suggests the euro won’t make significant moves until Christine Lagarde speaks.

Elsewhere, Riksbank’s May rate cut expectations have halved, reflecting market acknowledgment of the krona’s importance in June’s decision. Riksbank officials emphasize the risk of disinflation associated with a weaker SEK. Although SEK looks fragile, upside risks for EUR/SEK may be limited, with key events including GDP data tomorrow and CPIF on April 12.

GBP: Sterling Holds Steady Amid Positive Sentiment

GBP/USD maintains a positive stance around 1.2650, buoyed by improved risk appetite and strong UK retail sales data. BRC Like-For-Like Retail Sales surged in March, marking the strongest growth since August 2023, driven by early Easter sales. Looking ahead, GBP’s trajectory may be influenced by upcoming GDP and factory data, along with Bank of England Governor Andrew Bailey’s appearance. Expectations of BoE interest rate reductions from June have intensified, fueled by easing price pressures.