News & Analysis


The pound has joined the rest of the G10 excl JPY and CHF in rallying against the dollar this morning as last week’s Fed induced USD breakout seems to have stabilised. While the minor rally this morning has helped stabilise the pound, GBPUSD still trades close to its year-to-date low. In the lead up to this week’s Bank of England meeting, the pound is likely to take its cues from the broader dollar move, while positioning may also play a role on Wednesday. Thursday’s announcement is largely expected to see the BoE raise rates by 25bps which would see Bank Rate climb to 0.5%. This would kickstart the BoE’s plans to shrink its balance sheet by allowing maturing Gilts to roll-off, including March’s £25bn block. Our base case is for this to transpire, although we note there is a non-negligible risk that the Bank delays the balance sheet process which would be dovish for the pound if it occurred. Overall, however, should the Bank opt to raise rates and press ahead with reducing its balance sheet, sentiment around GBP is likely to become more bullish. GBPEUR will be watched closely for any breakout in its recent range, especially with the BoE and ECB set to announce policy within hours of one another.


While moves in the euro are nothing to write home about this morning, the BTP-Bund spread sharply declined from recent yearly highs to lows last seen in November following the outcome of the Italian elections. The BTP-Bund spread gives markets an indication of confidence in Italian bonds relative to more stable German bonds, and this morning’s move showed Italian bonds made a comeback. This is despite the election outcome being rather different than most had anticipated: instead of markets waking up to Mario Draghi being the new president, Italy’s parliamentarians decided against voting for him and instead backed a second term for outgoing head of state Sergio Mattarella. Mattarella agreed to put off his retirement, which means Draghi will remain Italy’s prime minister. The combination of the two being in office at least until the end of the legislature in spring 2023 is welcomed by European markets as they have been figures for Italy’s financial and political stability. The lack of reaction in the euro is likely due to funds moving within eurozone bonds – e.g. from Germany to Italy, rather than investors moving their assets from outside of the eurozone to Italian bonds. On the whole, however, the outcome of the election eliminates at least one area of uncertainty for the eurozone. The Russia-Ukraine situation – arguably the bigger area of concern – will be watched heavily by markets this week as it may become clear what form the sanctions on Russia will take.


Sentiment around the US dollar seems to have calmed down somewhat this morning, with most G10 currencies strengthening against the greenback since the APAC session. It should be noted that price action at times reverses on Monday afternoon when US markets open, and this could still be a possibility for today given headlines are supportive of a risk-off market mood. Russia further boosted troop levels on the Ukrainian border, according to the Pentagon, and wants an explanation of European security obligations before making its next proposals. At the same time, US senators are close to finalising the sanctions bill while President Joe Biden said on Friday he will send American troops to Eastern Europe. The UN Security Council will debate the Russia-Ukraine situation on Monday. However, despite the headlines, it must be noted that tensions are yet to spill over thus far and negotiations continue to be conducted. On the monetary front, last week’s FOMC meeting caused markets to ramp up rate hike expectations further throughout the week to now price in five rate hikes in 2022. Atlanta Fed President Raphael Bostic told the Financial Times that the Fed could opt to raise rates by 50bps in March if needed, although he still thinks three rate hikes in 2022 are the most likely scenario. With today’s calendar being virtually blank for the US and some Asian markets being closed due to the Lunar New Year, markets will keep their focus on geopolitical tensions today as well as moves in US Treasury markets upon the US open.


Last week saw the loonie drop over a percent and a half against the dollar as monetary policy divergences became more apparent. This morning, however, the loonie is up a third of a percent against the dollar as the greenback goes offered across the majority of the G10 space and oil, along with other risk assets, embrace the easing geopolitical tensions over the weekend and the pressure from US rates. This week, the focus for USDCAD will remain on rate differentials as bond traders adjust to incoming growth and employment data from both the US and Canada. Data out of both economies for late Q4 and January will show the impacts of Omicron, with the downturn in Canada likely to be more pronounced due to official lockdown measures being implemented. Markets and economists are aware of this, meaning the FX implications are likely to be driven by the deviation in the data relatvive to consensus expectations.



This information has been prepared by Monex Europe Limited, an execution-only service provider. The material is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is, or should be considered to be, financial, investment or other advice on which reliance should be placed. No representation or warranty is given as to the accuracy or completeness of this information. No opinion given in the material constitutes a recommendation by Monex Europe Limited or the author that any particular transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research, it is not subject to any prohibition on dealing ahead of the dissemination of investment research and as such is considered to be a marketing communication.