The Morning Update

The USD steadies, oil prices are firm, equity markets are down, and US yields are rising on a hawkish Fed. Currency markets remain sidelined ahead of Friday's crucial US PCE report, with economists expecting the PCE deflator to rise to 2.7% annually in April. Equity markets are under pressure on hawkish remarks from Fed's Kashkari that interest rates are not entirely ruled out. Oil prices extended gains following another attack in the Red Sea, increasing geopolitical tensions in the Middle East. US yields jumped 9bps, with the 10-year yields edging to 4.54% after weak US bond sales. Elsewhere, silver prices steadied, while gold prices eased, and Bitcoin weakened below 68k. Today's German inflation report, the Fed Beige Book, and the Fed's Williams & Bostic speeches will help provide intraday direction to currency markets.

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In other news. The IMF upgrades China's 2024, & 2025 GDP growth forecast but warns of risks ahead. Russia sanctions are ineffective, says Dubai trade hub chief. Anglo won't extend the BHP deadline, threatening the end of the takeover bid. Macron says Ukraine should be able to target Russia with Western arms. Orange juice promotes a search for alternative fruits. Georgia adopts Russian-inspired foreign agents' law. China gears up to make a deal with Europe as EV tariffs loom. South Africa votes in the most competitive election since the end of Apartheid. Fitch downgrades TD Bank's outlook to negative on anti-money laundering issues.

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In currency markets. The Japanese yen drops to a fresh four-week low, the Chinese yuan weakens to a six-month low despite state bank support, and the Philippine peso hits Nov 2022lows. GBP & the USD make gains against their peers with the prospect that both central banks will hold their domestic interest rates on hold beyond Q2. CNY & Asian currencies ease 0.1% on average against the USD. Trading currencies come under pressure, with IDR tumbling 0.45%, SEK weakening by 0.3%, AUD & NZD down 0.1%, MXN, CHF, JPY & NOK flat against the USD.

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In commodity markets. Oil prices strengthened by 0.8%, Gold, Natural Gas & Copper prices weakened by 0.45%, Silver prices firmed by 0.2%, Wheat prices tumbled by 0.75%, and Soybean prices slipped by 0.15%.

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CAD weakens from yesterday's 1-week high despite higher oil prices as investors increasingly expect that the Bank of Canada will cut interest rates at its June 5th meeting, while at the same time, the Fed is expected to keep rates steady through Q4. Investors will be focused on Friday's CAD GDP report, which forecasted the economy to grow at 2.2%, slower than the 2.8% pace the BoC had forecasted back in April. With the increasing possibility of an interest rate cut by the BoC on June 5th, we anticipate the loonie will come under increasing selling pressure vs its peers.

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EURCAD holds steady near 5-month highs ahead of today's German inflation report and Friday's CAD GDP report. Both banks are increasingly expected to cut their domestic interest rates next week, but we expect the Cad to remain on the back foot as the BoC may cut several more times than the ECB ahead of Q4.

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EUR continues to straddle 1.0850 as investors await the German inflation report. The German CPI is expected to rise slightly to 2.4% y/y vs 2.2% previously. Tuesday's upbeat US consumer sentiment has helped the USD find demand. With increasing expectations of an interest rate cut as soon as June 6th, we expect the Euro to come under further selling pressure. In an interview with the FT on Monday, ECB Lane suggested that the ECB could be ready to cut interest as early as June.

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GBPEUR hits its strongest levels since 2022 as the Bank of England is increasingly expected to trail the European Central Bank in lowering interest rates.

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GBP continues to trade within a narrow range, holding around 1.2750. Despite upbeat US data and UK political uncertainty ahead of the July 4th election, the pound has managed to hold steady as investors appear singularly minded on the prospect that UK interest rates will hold steady into Q3. Without any high-tier data releases from the UK this week, we expect investors to be sidelined until Friday's US PCE data release.