News & analysis


Sterling traded heavily in the early part of yesterday’s session, sustaining nearly half a percentage point of losses against the dollar. However, hawkish undertones from the Bank of England reversed sentiment around the pound, resulting in it climbing into the green despite a broad bid in the dollar within the G10 space. The Bank of England’s latest meeting saw no policy adjustments with regards to the Bank Rate, the QE program and the TFSME conditions, but the monetary policy committee did instruct the Prudential Regulation Authority to instruct PRA-regulated financial institutions to put the framework in place for a potential negative Bank Rate in the future. While the BoE was extremely cautious in labelling the move to prepare for negative rates as a formality, and not a sign that negative rates are on the near-term horizon, markets seemed to play ball with the message. Fixed income markets priced out the possibility of negative rates across the whole SONIA curve, while the pound enjoyed the optimistic outlook painted by the MPC to rally against G10 peers. The following press conference had a rocky start as audio problems persisted, however, Governor Bailey and Co doubled down on the Bank’s hawkish message by stating that the pace of QE would have to slow down towards the end of the year. On net, the Bank painted a very positive picture and highlighted that policy normalisation was likely to occur earlier in the UK relative to developed markets, where central banks are frantically trying to retain optionality with regards to their monetary policies. Whether this was the right decision so early on in the economic recovery is yet to be seen, however, it provided sterling with a tailwind to climb back up towards recent highs.


The euro has been on a losing streak against the US dollar all week, with yesterday’s session seeing another 0.70% plunge. However, this morning the euro managed to resist further depreciation against the greenback, although any calls for a large rally seem premature at the moment based on the current lockdown situation in the eurozone and the unfaltering divergence in vaccine distributions. Germany and France signalled it is not the time to ease measures yet, although France announced it will not go back into a full lockdown despite the worrying virus situation. Prime Minister Jean Castex said in yesterday’s press conference a lockdown should only be used as a “very last resort”. German Chancellor Angela Merkel said it’s still too soon to ease the lockdown in Germany, even as the domestic case count shows signs of easing. German federal and state leaders will meet on February 10th to review Germany’s current lockdown, which is set to expire on February 13th, but fears of a third wave led by more infectious virus variants remain. While these narratives are likely weighing on the euro, the narrowing BTP-Bund spread, which is trading at its lowest level since January 2016 this morning, may be an offsetting factor for the currency.  Today the focus will be on whether former ECB Chief Mario Draghi is able to build a new technocratic government in Italy. Italian BTPs seem to take it as an undeniable fact, however, Draghi will still need parliamentary support to form a government and this is not a given.


The US dollar traded firm this week with the dollar spot index reaching higher levels every day of the week until this morning saw a stark reverse in the trend which led to USD trading at session’s lows against EUR, CAD, JPY, AUD, and the Scandies. Despite the reversal, DXY is still trading near a two month high ahead of today’s Nonfarm Payrolls and the meeting between Democratic House leaders and Joe Biden, as the Democrats move forward with the budget reconciliation process that could pass Biden’s $1/9tn stimulus proposal through both chambers without requiring bipartisan support. Today’s NonFarms are expected to show a continuation of poor labour market dynamics, although the consensus stands at a positive 105K today compared to last month’s print of negative 140K. The dollar will likely take cues from today’s labour market readings while headlines around the fiscal stimulus deal will continue to play a role in dollar dynamics on the background.


On an open-to-close basis, the Canadian dollar has traded in a tight 0.85% range this week as the rally in oil markets was offset by a sluggish risk environment which propped up the US dollar. This morning, the dollar has unwound some of its recent strength against the G10 on the whole, resulting in the loonie climbing a third of a percentage point in early trading. This comes ahead of an important afternoon jam packed with labour market data in North America as both Janaury’s NonFarm payroll data in the US and Canada’s Labour Force Survey data are released at 13:30 GMT. Both labour markets are expected to sustain further employment losses in January as tighter lockdown measures over the winter months place increasing pressure on the economy. After shedding a revised 52.7k jobs in December, Canada’s labour market is expected to unwind a further 40K jobs in January as the economy becomes more accustomed to lockdown conditions. The divergence in the labour market readings is likely to drive the USDCAD pair this afternoon before markets close for the weekend, with the loonie currently trading flat relative to Monday’s opening price.



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