Price action in the pound has been nothing to write home about over the last 24 hours. With very limited coming across in the shape of headlines, GBPUSD has been driven by broader market flow. Although, the pound’s resilience to close lower against the dollar in bouts of broader USD strength in G10 FX markets has been notable and suggests traders may have settled on a more comfortable short-term equilibrium post Bank of England. This was also the case in front-end Gilt yields, which rallied 6bps in yesterday’s session where other core front-end bonds saw yields decline. Markets are slowly coming around to the idea of a minimum 40bps worth of hikes by the BoE over the coming year or so, again putting a floor under the 2-year yield. The question market participants will be asking is how long can this dynamic carry on for? With limited market moving events in the calendar today, beyond US CPI at 13:30 GMT and MPC member Tenreyro speaking on “secular stagnation after Covid-19” at 14:00 GMT, a stabilisation in expectations may again drive price action in UK assets.
Similar to the pound, movements in the euro were bog standard as domestic headlines were sparse and mixed results from the German ZEW survey failed to lead the currency in a certain direction. Optimistic expectations were offset by a worsening assessment of current conditions in the survey, despite Monday’s survey data from the eurozone printing higher. Comments from European Central Bank’s Isabel Schnabel also failed to move the currency when she stated the ECB risks exacerbating inequality if it raises interest rates before stopping asset purchases. EURUSD may see further weakness today if US CPI figures print to the upside, while the eurozone data calendar does not include any top-tier data.
After a mixed session yesterday, the dollar ticked up this morning along with Treasury yields ahead of key US inflation data at 13:30 GMT. With this week’s economic calendar being rather sparse for most of the G10 countries, all focus will be on today’s US consumer price data which will likely show an acceleration in October. CPI is expected to rise 5.9% YoY and 0.6% MoM, while core inflation is set to climb 0.4% MoM – twice the level of September’s reading. A higher than expected CPI print should kickstart a move in bond markets and the dollar as market implied rates have shown limited reaction to the Federal Reserve’s pushback on rate hike expectations so far, as evidenced by eurodollar futures. This means policy expectations are still high as markets continue to price in a rate hike for 2022 despite some Fed members pushing back on this idea. San Francisco Federal Reserve President Mary Daly stated yesterday she expects supply-chain constraints to persist into next summer, but price pressures should moderate after pandemic effects wane. Daly is a voter on the committee this year. Also in the background for markets, progress on Biden’s “Build Back Better” is becoming visible with House Speaker Nancy Pelosi expecting the $2trn package to be voted on as early as next week, following the recent passage of the $1.2trn infrastructure bill. While the latest fiscal package is expected to be altered in the Senate as Democrats seek to pass it via the reconciliation process, the mere emergence of the proposal into the public eye suggests that further fiscal spending pledges are beginning to advance.
Similar to the pound, price action in the USDCAD pairing has been muted. Following the decline in the loonie after the sell-off in front-end rates on Thursday, the Canadian dollar has been etching back lost ground. With limited fresh drivers in the vista, the rally has been slow going; yesterday’s gain of 0.03% compounded Monday’s 0.1% appreciation. In lieu of any economic data, oil markets and equity returns have been back in focus for CAD traders, with both factors supporting a stronger Canadian dollar of late. WTI has been tracking back to recent highs of $85.41, with the price of the North American benchmark currently trading at $84.40, while US equities also hover around recent highs.