Sterling’s performance throughout yesterday’s session was questionable in parts, but the pound ultimately closed out the day 0.3% higher against the dollar as it consolidated earlier gains late on in the session. Volatility wasn’t lacking throughout the day, however, with GBPUSD falling 0.27% around the 4pm fix, before quickly reversing losses. Despite starting the day out sustaining losses against the euro, sterling’s overall positive performance throughout the day resulted in fresh highs on the GBPEUR cross, but the pound is placed back under pressure this morning as the risk environment remains tentative. With limited developments in store for sterling, it is likely to continue taking its cue from broader market sentiment today as traders square off positions ahead of the Easter bank holiday.
The euro enjoyed a modest boost throughout the entire G10 space yesterday with the exception of GBP, despite France announcing a fresh four-week nationwide lockdown in a press review last night. The euro managed further depreciation this morning as well, likely as it is already trading near to key support levels. The French lockdown comes after Italy, Germany and the Netherlands extended restrictions through April and indicates that the Q1 contraction will at least partially spill over to Q2. As has been known for longer, the manufacturing sector has held up steadily throughout the second and third wave and this morning’s Purchasing Managers’ Index figures were another proof of that. Spain’s manufacturing PMI rose to 56.9 vs the consensus of 56.0 while Dutch figures climbed up to a whopping 64.7, likely following the modest loosening around retail shops in the Netherlands as the government announced in March that stores could receive planned visits with a maximum of two customers per floor. France’s final PMI figures were revised upwards from 58.8 to 59.3, while German and euro area numbers were broadly unchanged. The euro enjoyed a 0.25% increase vs the US dollar since the start of the PMI releases, indicating that trading sentiment for the euro is not a lost cause, especially as European equities also edge towards intraday highs this morning. Meanwhile, European Central Bank chief economist Philip Lane wrote in a blog post this morning that the “medium-term outlook for inflation remains subdued and “the pandemic shock continues to pose ongoing risks to the projected path of inflation”. With the remainder of the calendar being empty today, the trading impetus may be more limited ahead of Good Friday tomorrow.
The US dollar softened across the G10 currency board throughout yesterday’s and this morning’s trading session, with JPY being the only exception to the rule. President Joe Biden presented a $2.25trn US infrastructure plan yesterday, including $850bn for manufacturing, $620bn for transportation and $650bn for initiatives such as cleaner water and high-speed broadband. His plan is likely to face opposition from GOP lawmakers, especially as the plan is to finance the plan by raising the corporate income tax to 28% and set a 21% minimum levy on global corporate earnings. Democrats aim for the plan to pass the House by July, even as Republicans will likely reject it, and it may reach the Senate before the August recess. Along with how much of Biden’s infrastructure bill makes it through Congress by July, the US heads into the new quarter with inflation expectations still elevated, the Fed pretty much anchoring front-end yields by keeping policy accommodative and the US having a head start with vaccinations. For now, this adds to the strong dollar story, but improving sentiment overseas as vaccine pace picks up in the euro area may challenge the greenback’s favourable position. For now, markets will focus on weekly jobless claims that are scheduled for release at 13:30 GMT.
Broad USD weakness filtered into the loonie yesterday, as the Canadian currency gained 0.55% over the course of the session. The loonie’s session was characterised by January’s GDP data, which outpaced expectations by printing 0.7% MoM for January, and the Bank of Canada’s results from consultations on inflation and monetary policy. The results of the BoC’s discussions with the public were arguably more meaningful than the GDP data, largely because of the implications it has for the five-year framework review, which is due to be completed this year. The BoC’s framework review is now under the microscope after the Federal Reserve shifted to a more dovish average inflation target. With pricing in financial markets suggesting the Bank of Canada will hike before the Fed, any signs of a shift towards an average inflation target style framework would’ve resulted in a substantial unwind in money market positions, which would weigh on the loonie in turn. “Generally, when given the choice between the Bank’s current inflation-targeting approach and an alternative framework, most opted for our existing approach”, the report said. “Participants perceived it to be easy to understand and the most achievable option, given the Bank’s tools”. The public perception of the Bank’s reaction function is critical for inflation expectations and pricing behaviour on a more microeconomic scale, which in turn anchors the economy-wide inflation trajectory. Under the current assessment, market expectations for QE tapering in April’s meeting and earlier lift-off by the BoC compared with the Fed still seems reasonable in our view. Today, the loonie’s focus will be on market positioning ahead of thinning liquidity conditions, while the OPEC+ decision on production will also be carefully monitored.
The Australian dollar is under pressure this morning after it dropped to its lowest point since December 23rd in early trading. Sitting 0.45% down at the time of writing, the currency has reclaimed some lost ground after losses extended to as much as 0.88% this morning. With thin liquidity conditions, it didn’t take much for the currency to break lower, with many attributing the sharp drop to stops being triggered after the currency breached a key psychological level – March 25th’s low. Pressure was placed on the Aussie dollar early on after trade balance data for February undershot expectations, with exports contracting 1% MoM. The decline in AUD has also weighed on the kiwi dollar this morning, which also sits deeper in the red against the dollar than most G10 peers at -0.15% on the day.