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Week Ahead: Risk markets and the dollar hope to stabilise amid rising recession risks

Markets are expecting another volatile week with whippy price action across asset classes. Last week’s midweek selloff in equities saw the benchmark S&P500 index clock its worst daily decline since June 2020. Corporate earnings from two of the biggest US retailers fanned the flames. The impact of inflationary pressures and ongoing supply chain disruptions on profit margins brought the outperformance of this sector to an abrupt halt.

One of the current questions for markets now is whether the consumer can hold up while broad-based price rises take effect. This is also the conundrum for policymakers and especially the Fed. Recession fears have hit the dollar recently, as the FOMC strive to achieve a “soft landing” by reining in inflation pressures without choking off economic growth.

Before we take a deep dive into what to expect over the next few days, here is the scheduled economic data releases and events in the coming week:

Monday, May 23

  • EUR: Germany May IFO Business Climate
  • GBP: BOE Governor Andrew Bailey speech
  • USD: Fed speak – Atlanta Fed President Raphael Bostic, Kansas Fed President Esther George

 

Tuesday, May 24

  • EUR: Eurozone May PMIs
  • GBP: UK May PMIs
  • USD: US May PMIs

 

Wednesday, May 25

  • NZD: RBNZ rate decision
  • US crude: EIA weekly US crude inventories
  • USD: FOMC May meeting minutes

 

Thursday, May 26

  • USD: US 1Q GDP (second estimate), weekly initial jobless claims
  • CAD: Canada March retail sales

 

Friday, May 27

  • CNH: China April industrial profits
  • AUD: Australia April retail sales
  • USD: US April personal income and spending, PCE deflator, and May consumer sentiment (final print)

 

Dollar façade cracks

A relatively hawkish US central bank should be seen in the FOMC minutes published on Wednesday. This will give us more clues on the Fed’s thinking on how to navigate future policy tightening in such an environment. It should also underpin support for the greenback after its first weekly drop in seven.

But global yields are rising and narrowing the gap with those in the US. This key cornerstone of support for the dollar is now looking tired and signs of more softness in US data could see some repricing of the USD, even if other currencies have their own challenges.

DXY

European currencies proper

The euro and pound have eased from their oversold conditions, which is not surprising when you consider the latter had fallen over 10% from January’s high. The PMI surveys in both the eurozone and UK are expected to show warning signs of the high inflation environment. The long-term downtrend in both these major currencies still remains. However, especially in the euro’s case, monetary policy expectations and rate hikes have stabilized the currency and could help extend gains in the near term.

EURUSD

The swiss franc was the best performing major currency last week on the back of hawkish chatter from the SNB, as well as some safe haven buying. The central bank appears to be targeting a stable real exchange rate to fight inflation. This means the exchange rate, all things equal, needs to be stronger so the CHF strength may continue.

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