News & Analysis


The pound was one of the best performers across the G10 currency board yesterday as markets’ hawkish repricing of Bank of England policy tightening lifted Gilt yields, ahead of the slew of BoE speeches set to occur this week. Chief Economist Huw Pill will be speaking at 13:10 GMT on the “UK monetary policy outlook” at the Society of Professional Economists’ annual conference. Communication is likely to follow that seen on Friday of last week, where Deputy Governor Ben Broadbent joined others in trying to hammer home the Bank’s view that markets have got ahead of themselves with pricing in rate hikes. This may leave sterling more vulnerable, especially following the rally leading up to the speech, while at the same time if Pill’s pushback on rate hike expectations is less aggressive, it may fail to dampen GBP sentiment. Beyond Pill’s speech, the calendar for the UK is virtually blank today.


Volatility in EURUSD has been more muted since the start of the week as markets are awaiting more data from the US in order to gauge the next monetary steps by the Federal Reserve. The euro has come down from recent highs across the G10 but remains well supported as last week’s ECB meeting sent a signal to markets that the ECB is soon going to have to join team hawk. ECB member Francois Villeroy stated yesterday that markets may have overreacted to what they see as a hawkish pivot from the ECB, however. He said inflation will slow to around 2%, and the central bank is flexible about the pace of normalisation. Similar to Lagarde earlier in the week, his comments sounded more dovish compared to the policy meeting but market expectations were only trimmed marginally. Supplementary commentary by ECB members has failed to take the single currency back to pre-meeting levels against both the dollar and the pound. However, it is notable that the euro continues to lag the broader move within the procyclical G10 space.


The dollar traded mixed against the G10 again yesterday, however, price action was more clear cut than during Monday’s session. The dollar, boosted by rising Treasury yields, posted further gains against yield sensitive currencies like JPY and CHF, while NOK and CAD also continued to slip with oil prices. Stability in North American and European stock markets meanwhile lifted risk sentiment and saw AUD lead the charge against the dollar yet again. The Aussie dollar, boosted by the recent rise in front-end yields and the stabilisation of risk appetite has benefitted from the short squeeze despite the backdrop of falling oil prices weighing on commodities as a whole. This morning, a moderation in European yields and US Treasury futures prior to tomorrow’s US CPI release are weighing on the dollar at the margin. However, with such a large event set to take place tomorrow, ranges within the G10 FX complex are likely to remain tight.


The slip in WTI below $90 per barrel on expectations of Iran rejoining the global market weighed on the loonie in yesterday’s session and saw the currency retrace half of Monday’s gain. Data on Canada’s trade balance for December was also negative for the loonie yesterday, and although the data had a limited effect in isolation, it added to the bearish sentiment around the currency. The trade data saw Canada post a deficit of C$137m in December, undershooting expectations of a C$2.5bn surplus. This morning, oil markets are limiting any CAD gains against a broadly softer dollar, while BoC Governor Macklem’s speech is set to be the main economic event today at 17:00 GMT.

FX Elsewhere

The Polish zloty initially weakened after the National Bank of Poland announced a 50bps rate hike to reach a rate of 2.75% yesterday even though this was widely expected, arguably as recent hawkish remarks from Governor Glapinski sparked anticipation around a bigger move. Since then, however, the zloty recuperated losses and has been trading above two-week highs against the euro this morning while USDPLN is trading well above three-week highs. NBP Governor Glapinski holds a press conference at 14:00 GMT today, which could see further hawkish tones, especially as he voiced support around a stronger zloty recently and has signalled readiness to deliver further hikes. This could see the zloty strengthen further today.


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