News & Analysis


The pound dipped slightly in early trading as data out this morning delivered an upside surprise, but not of the good kind. Public sector net borrowing figures for April showed the UK government borrowed £25.6b once stripping out banks, above the consensus estimate of £19.1b that had been expected as well as the OBR forecasts. This uptick reflects the impact of higher energy costs, benefit payments and an increase in the interest payable on gilts, of which the UK holds an unusually large fraction that are inflation linked. However, with the energy price guarantee likely to expire shortly and inflation ticking down there is perhaps room for some optimism looking forwards, despite today’s alarmingly large number. Markets are unlikely to dwell too much on these borrowing figures however, with flash PMIs for May due to be released at 9:30 BST. These should give traders a better idea on UK growth conditions, inflation and therefore the path forward for Bank Rate. Current expectations are for this set of releases to show robust overall growth once again, in spite of Bank Rate that has risen over the past year to now stand at 4.50%. More attention will therefore fall on indicators for the labour market, a factor that has been stressed consistently by the BoE as central to their thinking on future rate hikes. The recent REC report on jobs showed some signs of weakness but was far from conclusive, so an indication that pricing pressures are not being transmitted to consumers would be a welcome sign for the Bank of England.


The single currency outperformed the G10 complex with the exception of the Swiss franc yesterday as hawkish commentary from Bank of France Governor Francois Villeroy helped to lift expectations of the ECB’s hiking cycle to their highest level since the May 4th meeting. Speaking at a conference in Paris, Villeroy said he expected the ECB’s terminal rate to be reached “no later than September”, suggesting a maximum of three additional hikes are in the pipeline. At the current pace, that would imply a ceiling to the deposit rate at 4%. Adding to the recent bombardment of hawkish commentary, Villeroy’s remarks saw pricing for the September meeting rise to around 3.688%, implying two full rate hikes and a 20% probability of a third from the current effective rate. Whether the ECB can or even needs to get rates to that level will depend on the strength of the underlying economy, which will be in focus today given May’s flash PMIs are due for release between 8:15 and 09:00 BST and follow on from recent soft survey and industrial production data that has landed below expectations. Specifically for investors, the strength of the service sector and its prices paid index will be in scope. This is especially pertinent given ECB Chief Economist Philip Lane yesterday stressed the need to view core services and core goods inflation separately instead of just the headline core index. Unlike core goods inflation, price growth in core services is yet to roll over as it climbed 0.1pp to 5.2% YoY in April. Signs of continued strength in services and the prices paid component will likely embolden hawkish bets of the ECB and push back on the recent decline in EURUSD on the narrative that the eurozone economy is cooling.


The dollar closed yesterday’s session broadly flat even as it split the G10 basket, gaining against the Japanese yen and higher beta currencies while depreciating against the euro and the Swiss franc. While events within the FX space were relatively quiet, the same can’t be said in the bond market as the US 2-year climbed back up to its Friday peak of 4.35%, where it is currently trading. Driving the flattening in the yield curve was hawkish commentary from St. Louis Fed President James Bullard, who once again outlined his specific preference for two additional hikes this year, and further conciliatory tones from Washington. In isolation, Bullard’s comments would have fallen to the wayside for markets given he is a non-voting Committee member this year and a well-known perma-hawk, but the fact they coincided with headlines about further bipartisan meetings meant the rally was well and truly on across front-end bonds within the developed market space. Although both President Biden and House Speaker Kevin McCarthy have expressed that “default is off the table” and have stated the latest round of talks are the most constructive yet, markets are still left without a deal on the table as Treasury Secretary Janet Yellen brings forward the X-date to as soon as June 1st. Once again, debt ceiling dynamics will be top of mind for investors as Fed Chair Powell is set to address a new coalition lunch this afternoon, where he will likely outline the severity of the economic fallout should a deal not be brokered, and bipartisan talks are likely to continue as McCarthy stated that he and the President will talk “every day…until we get this done”. While this means fixed income markets are likely to call the tune for the dollar, that won’t be until this afternoon. Ahead of this, growth conditions in the eurozone and how markets continue to price Chinese growth conditions will continue to dictate how the broad dollar trades. Given further weakness in CNY overnight, the dollar has started the European session on the offensive. This move could extend should May’s flash eurozone PMIs further undermine the European exceptionalism narrative that has propped the euro up until May. In the data calendar stateside is May’s preliminary PMIs at 14:45 BST, new home sales data for April at 15:00 BST, alongside the Richmond Fed manufacturing index for May.


Yesterday’s session proved a quiet one for the loonie, with no data in the calendar and attention focused on political developments south of the border. The Canadian dollar finished flat against the greenback with modest volatility, a trend that looks set to continue once again through today with industrial product prices and raw materials prices the only release of note. More important for the loonie in coming days is likely to be progress on debt ceiling negotiations, with the potential for any impact on the US to have spill over effects into the Canadian economy. But like everyone else, Canadians will have to continue to wait and see..

FX Elsewhere

The early hours of tomorrow morning (03:00 BST) are set to bring one of this week’s most noteworthy economic events, with an announcement of the latest monetary policy decision from the Reserve Bank of New Zealand. Consensus expectations foresee yet another rise in the official cash rate, this time by 25bp, taking the policy rate to 5.50%. However, perhaps wary of the message sent by the last policy announcement, where the RBNZ surprised market consensus by hiking a larger than expected 50bp, risks to the consensus are seen as skewed to the upside. Given the RBNZ expressed preference for front loading policy, a reduction in the speed of hiking would be suggestive that the central bank is close to the end of its hiking cycle. This decision comes hot on the heels of several other developments that have seen a recent reversal in AUDNZD, a move triggered by a surprise RBA pause and helped along by slower than expected Chinese growth data. However, signs that the RBNZ is close to its terminal policy stance could see some upside impetus in the cross and a possible reversal of recent moves.



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