After trading in the green against the dollar in the run-up to yesterday’s Bank of England meeting, the pound dropped like a rock once the policy statement was announced. In a stark contrast to the previous meeting, where members voted 5-4 in favour of hiking rates by 25bps, with dissenting members voting for a 50bp hike, March’s meeting saw the vote split compound around 25bps more with a vote split of 8-1. Not only that, but the one dissenting member, John Cunliffe, voted for rates to remain on hold instead of a larger hike increment. This wrong footed the street which had largely formed a consensus around a 7-2 split, with the two dissenting members voting for a larger hike. The hike was considered dovish by market participants, reflected not only in the pound’s plummet but also the sell-off in OIS. Expectations of a 50bp hike in May now sit at 35%, down from 50% prior to the meeting, while the implied year-end policy rate in the UK now sits substantially below 2%. This morning, the G10 currency board is evenly split. The pound is currently sitting in the green against both EUR and USD, but the moves are minimal. Focus will be on broader geopolitical pricing in markets as President Biden calls President Xi for the first time since the war broke out.
The euro rallied to fresh highs against the US dollar in yesterday’s session as risk-sensitive currencies led the way in G10 FX, while comments from several European Central Bank members also supported the single currency. Dutch central bank governor Klaas Knot reacted on the latest EURUSD weakness and stated further weakness in the pair would be unwelcome as Europe deals with the surges in energy prices. Knot also said he does not rule out two ECB rate hikes this year, but given his placement on the more hawkish side of the ECB spectrum his comments haven’t substantially moved market pricing on rate bets. ECB’s more dovish member Ignazio Visco also spoke about policy yesterday and stated he strongly believes monetary policy is not behind the curve, and there are good reasons to believe inflation will progressively converge to 2%. Meanwhile, Covid measures look to be thrown out the window completely with Italy and the Netherlands scrapping almost all restrictions at the end of March. For today, the eurozone calendar is virtually blank, however markets will focus on the Central Bank of Russia decision at 10:30 GMT today. While the CBR is unlikely to adjust policy after it raised interest rates from 9.5% to 20% after the implementation of Western sanctions, Governor Nabiullina’s statement after the rate decision will be watched. Revised forecasts aren’t on the schedule until late April.
The dollar sat on the back foot across the whole of the G10 currency board yesterday, with even JPY and CHF sustaining rallies. The perceived market risk mood has improved dramatically, and despite the more hawkish Federal Reserve, as outlined by Chair Powell and the central bank’s communications on Wednesday, the dollar has started to lose ground in a traditional unwind of haven flows. While the recent dollar decline has been notable as peace talks continue and more stimulus is signaled for the Chinese economy, we are hesitant to draw too many inferences from this week’s price action. While recent history suggests that the dollar declines in the infancy of the Fed’s hiking cycle, largely due to the fact that the market has already effectively priced the Fed in the run-up to the announcements, dollar downside is likely to be capped in this environment due to the lower growth profiles in both Asia and Europe. With a stronger domestic backdrop to tackle inflation in the US, the Fed will be able to tighten policy both faster and for longer than most other G10 central banks. Growth risks should keep both EUR and JPY capped for the time being too, and with both currencies contributing over 70% of the DXY index, this should limit broad dollar downside gauged by this measure. Today, the dollar is mixed across the G10, with commodity currencies like AUD still leading the charge against the greenback, while both EUR and JPY sustain losses. Focus today will again be on US markets during the cash open, as Treasury yields continue to sit below Wednesday’s highs and US equity futures point lower. The reaction in US markets will be key, especially as President Biden is set to call President Xi today for the first time since the war broke out in Ukraine and amid increasing concern that China could show more visible support for Russian actions.
The Canadian dollar strengthened a third of a percent against the greenback on Thursday as equities boomed and the VIX volatility index came down substantially from peak distress levels seen last week. Several FX market commentators pointed to a historical trend where the broad US dollar index tends to decline over the course of the first 6 months of a Fed tightening cycle, which could help explain today’s price action. Commodities rebounded Thursday with Brent and WTI crude up 9% and more refined energy products like heating and gas oil up by more than 12% from the previous trading day. Yield differentials may also have helped to shore up support for the loonie as Canadian bond yields ticked up a couple of basis points while US bonds did the opposite. At present, the risk-on move in markets should be taken in a tentative manner as signs from officials suggest that despite peace talks, there are no tangible signs of a diplomatic solution occurring. On today’s data calendar, we’ll be getting Canadian retail sales at 12:30 GMT, as well as US existing home sales at 14:00.