The pound ground lower towards key levels against the US dollar in yesterday’s session despite the improvement in risk sentiment, as gilt yields moved lower from recent highs while the EU filed its first post-Brexit court case against the UK. At the same time, political jitters around the Partygate report keep sentiment around the pound tentative. The move lower in yields came after Bank of England chief economist Huw Pill cautioned against the aggressive approach to rate rises, which markets took as a dovish signal. Comments by Governor Andrew Bailey will be watched at 17:00 GMT for further cues on the monetary policy outlook, ahead of tomorrow’s first reading of UK Q4 GDP.
Euro price action has been indecisive over the last sessions as markets are awaiting more cues from central bank speakers and data from the US this week. EURUSD remains well supported above key levels, however the lack of major headlines means the pair has been trading rather directionless this week. Markets carefully watch developments between Russia and Ukraine and focus on today’s commentary by ECB speakers Francois Villeroy, Philip Lane, and Luis de Guindos for guidance on monetary policy.
The US dollar took on some water in yesterday’s session as global equities staged a solid rebound and risk sentiment improved. Higher FX beta currencies traded in the green on the back of this, although the ranges against the dollar were still quite narrow after last week’s increased volatility in markets. Today, all focus will be on the US CPI report at 13:30 GMT, and whether this will shift market expectations from a 25bps rate hike in March to 50bps. Futures markets currently price in a one-third possibility of rates being raised by 50bps, and a stronger-than-expected reading can further embolden this. The consensus is expecting another increase in January’s headline inflation from 7.0% to 7.2%, while the core print is set to print close to the 6% mark. Fed officials have so far resisted the idea of a 50bps rate hike. Loretta Mester spoke out to the media yesterday and stated the Fed will lift rates at a faster rate than in 2015, however she sees a weak case for a 50bps hike in March. Fed’s Raphael Bostic added that inflation is likely to start declining. Today’s CPI figure could spark further volatility in rate markets and FX markets as it may challenge their views.
Yesterday’s session saw the Canadian dollar advancing against USD, however it underperformed against other higher beta currencies as falling crude oil prices weighed on the petro-linked currency. Today’s focus will be on a speech by Bank of Canada Governor Tiff Macklem, as the BoC is expected to raise rates in March and markets will use Macklem’s comments to gauge the Bank of Canada’s reaction function.