News & Analysis


Yesterday’s 0.24% rally in the pound was largely driven by the reopening of U.K. markets, with front-end Gilt yields drifting over 10bp higher and the FTSE 100 notching a percentage point rally on the day. Given UK markets were playing catch-up after a long weekend, market pricing wasn’t necessarily reflective of the increased political volatility, as evidenced by the muted reaction in GBP after the announcement that Boris Johnson survived the no-confidence vote. While the UK’s political backdrop remains fluid despite the Prime Minister remaining in power, largely due to the fact that such a high percentage of no confidence votes usually results in the PM resigning, the focus for U.K. markets turns back to weaker economic data and a stronger dollar on the back of Treasury higher yields. This morning, data from the British Retail Consortium showed retail sales contracted by 1.5% YoY in May, while credit card data from Barclaycard highlighted that British consumers continued to cut down on discretionary services spending. This morning’s data comes hot on the heels of a momentous drop in May’s services PMI and thrusts the weaker consumption outlook in the UK back to the forefront of investors’ minds as households feel the pinch from higher inflation. With growth conditions slowing and the UK labour market yet to generate wage growth that offsets the substantial decline in real incomes, the Bank of England will be hard pressed to continue hiking rates. The drop in GBPUSD this morning is reflective of this.


The single currency continues trading on the backfoot this morning as pressure from rising 10-year Treasury yields start to weigh. While eurozone bond yields have also drifted higher at the start of this week, along with the amount of ECB rate hikes priced into eurozone money markets for this year, the narrative of a more aggressive Fed for longer continues to weigh on sentiment. Today, ahead of the ECB’s next policy decision on Thursday, eurozone Sentix investor confidence for June is released. The data is expected to show a mild improvement, albeit it to still negative levels. However, with the data calendar largely consisting of softer, less market impactful data, momentum is likely to drag EURUSD lower ahead of Thursday’s meeting. While the ECB is not expected to alter policy this month, hawkish commentary from President Lagarde and much higher inflation projections would increase the prospect of a 50bp hike and offer the single currency another layer of support against the broadly stronger dollar.


Following on from a stronger-than-expected net employment increase in Friday’s payrolls report, US 10-year yields cracked above 3% for the first time since early May yesterday as concerns over a slower US growth outlook eased. The path for higher US yields has been cleared further by the former US Treasury Secretary, Larry Summers, who along with a panel of economists recalculated the core inflation rate in June 1980. At 9.1%, versus the reported peak of 13.6%, Summers and co argue that current core inflation in the US is much closer to the peak in core inflation during Volcker’s tenure as Fed Chair, suggesting much more aggressive monetary policy is required to return price growth back to the 2% target. The upwards pressure on US yields is providing the greenback with a renewed bid in G10 markets, but much of the 30bp rally in the US 10-year yield over the past week could be reversed on Friday if the US CPI report shows core inflation pressures already starting to moderate. Expectations for core CPI YoY currently sit at 5.9%, suggesting a 0.3pp decline from last month’s 6.2% reading which was regarded as the peak in US inflation.


The loonie strengthened by a relatively small 0.11% on Monday, rendering it one of the top performers in the G10 on a day that saw most of its FX peers fall against the greenback. However, despite rallying overnight, the Canadian dollar quickly gave back much of its daily gains as the North American session continued. Pressure from higher US yields, specifically the 10-year which broke 3%, was the main reason for the CAD retracement throughout the day as equity indices struggled to hold onto gains amid the higher interest rate environment. Hawkish BoC pricing provided CAD with a stable footing to close the session out higher, however, as Canadian bond yields moved higher in tandem with Treasuries. Additionally, Bloomberg’s base metals index, meanwhile, rose by 2.2% on the day, while WTI continued to trade around the $120 level. Yesterday’s price action came amid a barren landscape for Canadian and US data and news. On today’s calendar, we have both Canada and the US releasing April trade data at 13:30 BST / 8:30 ET.

FX Elsewhere – AUD and JPY

The APAC session reignited this morning with the Japanese yen dropping to fresh twenty year lows and the Reserve Bank of Australia surprising markets with a 50bp hike. On the yen, the resumption of widening yield differentials with the US has put the favoured long USDJPY trade back into focus for FX traders. While Bank of Japan officials continue to jawbone the yen and state that the renewed weakness isn’t purely a function of higher Japanese yields, as long as Treasury yields trade higher, FX traders will continue to send the currency lower. The pace of JPY depreciation is key for intervention, however, given the inflation passthrough. Should we see further outsized moves higher in USDJPY, intervention risk from the BoJ increases. Meanwhile, at 05:30 BST this morning the Reserve Bank of Australia hiked rates by 50bps to bring the Cash Rate target to 0.85%. With a 50bp hike expected by just 3 economists, today’s move extends the RBA’s recent tendency to shock markets with more aggressive policy tightening. In doing so, they effectively embolden higher terminal rates and Aussie yields, effectively tightening financial conditions by more than the policy move itself. The decision by the RBA initially boosted the Aussie dollar, but the broadly stronger greenback has largely eroded these earlier gains, resulting in AUDUSD sitting flat as European markets open this morning.



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