FOREX: USD Rally Poses Little Threat to Broader Downtrend
- Having underperformed all week - the dollar is benefiting from the risk-off, rally in oil prices and downtick in equities following the Israeli strikes on Iran. Resultantly, the USD Index is back above 98.00, but the bounce remains shallow: prices are already fading, and failed to top yesterday's high - let alone the levels of the first half of the week.
- As such, the broader downtrend holds firm, with the downtrendline drawn off the early February highs (today at 99.235) under very little threat from this dollar bounce.
- This leaves S/T momentum still pointed lower for the USD Index. The 50-dma premium over the 200-dma is now matching the most negative levels seen through COVID in 2020 - meaning the greenback is still trading through an acute phase of downward momentum only seen ~9 times since the year 2000 (see chart below).
- Today's bounce affirms the sell-on-rallies theme that's becoming evident in GBP/USD, however. The pair has pierced 1.36 on three occasions this month, and failed to materially build a base above.
Source: Bloomberg Finance L.P. / MNI
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EUROPEAN INFLATION: German Inflation Breadth Broadly Unchanged In April
MNI’s inflation breadth tracker (see chart below) shows disinflation overall continuing to stall in April, with the percentage of ECOICOP (European classification of individual consumption according to purpose, a standardized category split) items printing at or below 1% unchanged 42.8%. In the high-inflation categories, similar trends could be observed, with the percentage of categories above 5% falling just 0.3pp to 14.8% in April.
EUROPEAN INFLATION: German CPI Details Suggest Intact Underlying Disinflation
German final April HICP was unrevised from the flash readings at 2.2% Y/Y (2.3% prior) and 0.5% M/M (0.4% prior). The final reading to CPI was also unrevised at 2.1% Y/Y (2.2% prior) and 0.4% M/M (0.3% prior). Core CPI accelerated 0.3pp to 2.9% Y/Y, a rate not seen since January.
- Overall, the data confirms the main conclusions from the flash / state-level reading - services accelerated materially (contribution +0.20pp vs prior) on the back of the Easter effect while goods inflation slowed (contribution -0.25pp vs prior) following lower energy prices.
- Without (volatile) airfares adding 0.16pp and package holidays adding 0.08pp to headline vs March, services inflation's contribution to headline would have been lower than the month before.
- This speaks in favour of the process of underlying services disinflation being intact.
SWAPS: Recent German ASW Narrowing Stalls
German ASWs vs. 3-month Euribor are little changed on the day, recovering from session lows alongside outright bonds as equities move away from session highs.
- The recent move lower in ASWs has stalled a little over the past 36 hours, after the narrowing impulse from the moderation in Sino-U.S. tariffs moderated.
- ASWs trade closer to their cycle closing lows than their April highs, given the recovery in risk appetite/row back of U.S. tariffs.
- Medium-term, supply considerations are set to present ongoing pressure for long end spreads, but any further sell offs in spreads are unlikely to be linear, given the macro volatility evident at present.
