Sterling was one of the best-performing currencies in the expanded majors yesterday, losing out to just the Hungarian forint and Brazilian real. The pound’s 0.61% jump against the dollar is largely attributed to comments from outgoing external Bank of England policymaker Gertjan Vlieghe, who states that interest rates could rise as early as next year if the labour market recovers smoothly after the end of the furlough programme and the recovery is better than forecasted. While Vlieghe laid out these comments in a scenario-based presentation, attaching the idea of an earlier rate hike by the BoE to the upside scenario which doesn’t really provide much new information to markets, the fact that a dovish committee member signalled rates could be raised as early as next year got markets excited. Despite money markets already pricing in a rate hike in H2 2022, the comments from Vlieghe stoked FX markets into action and sent the pound charging to the top of the G10 pile. This morning, sterling is retracing some of yesterday’s move as it falls 0.14% against the dollar, with the DXY index rising by a similar magnitude. There is little scheduled in terms of economic events in the UK today, meaning the pound will be at the mercy of month-end flows ahead of the long weekend.
The euro was one of the better performers against the US dollar overnight, although the currency failed to escape the broader USD strength, leading to weekly lows in EURUSD. Market expectations of monetary policy tightening in Q3 may have eased somewhat after comments from European Central Bank member Francois Villeroy de Galhau who stated the ECB is in no rush to adjust its QE bond-buying pace, as the ECB still has “ample time to judge and decide, well beyond the June meeting”. He also said the current interest rates are not a floor and could be cut further if necessary, although this hasn’t spilt over into euro price action as the currency still benefits from vaccine and reopening optimism. Germany’s 7-day virus case count fell below the key threshold of 50 infections per 100.000 people for the first time since October, although policymakers will continue to carefully watch the numbers as Germany has just eased restrictions a week ago. Today’s calendar includes several confidence indicators from the euro area at 10:00 BST while G7 finance ministers meet online today.
The US dollar is firming against major peers this morning as it hits a seven-week high against the Japanese yen as talks around US President Joe Biden’s budget proposal take focus ahead of core PCE inflation figures, while month-end flows may also support the greenback ahead of the long weekend in the US and UK. Meanwhile, reports that the US and China held constructive talks in their first meeting under Biden’s presidency is likely supporting market sentiment, however, limiting the losses seen in procyclical currencies such as the euro against a stronger dollar today. President Joe Biden is set to unveil a budget that would increase fiscal spending to $6trn over the coming fiscal year, with annual deficits of more than $1.3trn over the next decade. This was cited by the New York Times, although the proposal itself is set to be released for the public on Friday. The New York Times documents stated federal debt would rise to 117% of GDP over the next decade, while spending would rise to $8.2trn by 2031. While markets keep an eye out on Biden’s plan today, focus is set on the core PCE reading at 13:30 BST as well, as this is the Fed’s preferred gauge of inflation. Inflation fears roiled financial markets when May’s consumer price index was released just over a fortnight ago, although given the CPI indicator has already highlighted the jump in inflation and Fed officials have already combatted it with comments about the overshoot being transitory, today’s PCE reading may provide only limited volatility in FX markets. Month-end flows and the official release of the fiscal stimulus plan are more likely to dominate price action. Citi’s month-end barometer points to mild USD buying, which is panning out in this morning’s session. However, their aggressive signal of USD depreciation at the end of last month proved wrong as the DXY index rose by 0.73%. This suggests that portfolio balancing could change the dollar dynamic once US markets enter the frame this afternoon ahead of the long weekend.
The Canadian dollar failed to catch the eye in yesterday’s trading session despite strengthening 0.46% against the US dollar. This was largely a byproduct of USD depreciation and pledges of increased fiscal stimulus in the US, which boosted crude oil prices and the outlook for Canada’s exports. While the rally in the loonie was notable, it merely marked a full reversal of Wednesday’s price action, with USDCAD trading in a 1.36% range for the second half of the month. With most of Canada’s economic events pencilled for next week, namely GDP data for March and the labour force survey for May, the loonie is likely to continue to trade in a tight range with its flow determined by broader market dynamics.
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