GBP jumps, CHF drops

A weaker than expected reading for March US durable goods orders maintained a run of soft US data releases, reinforcing concerns of an economic slowdown over coming months. Indeed, US growth is tracking closet to 1% in Q2 after a more robust looking growth rate in Q1. The data will play into the hands of doves in the Federal Reserve, with the FOMC set maintain its highly accommodative policy settings at next week’s policy meeting.

The bigger than expected drop in the April German IFO business confidence survey yesterday echoed the weakness in US data but if anything markets reacted positively as the data helped to intensify expectations of a European Central Bank (ECB) policy rate cut which could come as early as next month. Despite the weaker data equity markets and risk assets look generally well supported, with US Q1 earnings releases and monetary policy stimulus expectations helping to maintain the positive tone.

The USD has shaken off both weaker growth data and the subsequent decline in US Treasury yields but may struggle to make much headway until a more positive growth outlook is revealed by data releases. In this respect Friday’s Q1 GDP data will be somewhat backward looking despite a likely robust outcome of a 3.0% QoQ rate of growth set to be revealed. Markets instead will focus attention on next week’s manufacturing reports and jobs data.

Ahead of the US payrolls data we’ll be able to digest the Fed’s thinking on the “soft patch” on the economy and whether they believe it will extend much further. The USD index will likely consolidate ahead of these events, with the early April high of 83.494 likely to cap gains.

GBP/USD has struggled to make much headway over recent weeks. Nonetheless, the downgrade of the UK’s credit ratings by Fitch to AA+ from AAA+ had very little impact. The release of firmer than expected UK GDP data today, with the UK economy missing a triple dip recession has helped GBP to bounce strongly. I remain constructive on GBP but would prefer to play GBP versus CHF where the upside momentum is strengthening.

Both EUR/CHF and USD/CHF have made substantial headway over recent weeks and look to extend gains over the near term. Notably the improvement in risk appetite and resilience in Eurozone peripheral bonds highlights the reasons for the lack of CHF demand.

The selection of a new prime minister in Italy will ease political concerns and add to the pressure on the CHF. Additionally a likely softening in the Swiss April KoF leading indicator tomorrow, the 7th straight decline, will reinforce domestic pressure to weaken CHF. EUR/CHF is set to head towards the year high around 1.2690 over coming weeks.

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