The pound opened this morning on the defensive as the previous constructive risk backdrop flipped. However, a softer than anticipated May inflation report is only compounding downside momentum in the pound as rates markets price out the probability of a preposterous rate path for the Bank of England. Headline inflation rose from 9% to 9.1% in May, hitting a fresh 40-year high, but below the surface, inflation pressures were much more muted. This is best highlighted by May’s core inflation data, which fell below both April’s reading of 6.2% and expectations of 6% to 5.9% YoY. How this translates into a wider range of views within the MPC is so far unclear, but if the soft patches in today’s report are repeated in June’s data, the vote split at August’s BoE meeting may be less hawkish than last week’s 6-3 vote for 25bp-50bp.
The single currency enjoyed the more supportive risk backdrop and the further narrowing in eurozone bond spreads yesterday as it notched a gain of 0.2% against the dollar on the day. However, the tide has quickly changed this morning as global growth concerns return to the fore. Asian and European equities, along with US futures, have nosedived this morning as bonds go bid on risk aversion. Amid this environment, EURUSD is under pressure as markets favour the greenback along with other havens. With little scheduled in terms of economic events in the eurozone, flow is likely to dictate EURUSD price action ahead of Powell’s testimony. Looking at euro crosses, EURCHF is likely to draw the most attention today as Swiss National Bank Governor Thomas Jordan conducts a press conference at 14:00 BST following last week’s shock decision to raise rates by 50bps. The SNB’s new policy of a stronger real CHF is likely to coincide with today’s risk-off price action in FX markets. The drop in EURCHF may be extended beyond 0.25% today.
The dollar continued to trade on the back foot yesterday as global equity indices bounced. Opening for the first time since last week’s bloodbath, the S&P 500 notched gains close to 2.5% on the day, with other US indices also rising north of 2%. Today, the focus sits primarily on Fed Chair Powell’s testimony to the Senate Banking Committee at 14:30 BST. Last week, Powell effectively soothed markets in the Fed’s press conference following the central bank’s first 75bp rate hike since 1994 and a more hawkish set of dot plots as he aimed to keep as much optionality in policy as possible. A similar stance is expected today, but with the Fed’s approach to tackling inflation now well messaged, focus will likely sit on the central bank’s expectations for growth as regional Fed nowcasts suggest recessions and a stagnant growth outlook in the coming 18 months. While the dollar trades stronger into Powell’s testimony, a reassessment of the Fed’s terminal rate lower could see the dollar wipe out today’s gains.
Markets will be gearing up for the latest CPI report out of Canada today at 13:30 BST/ 08:30 ET. May’s inflation data comes hot on the heels of last week’s Fed decision, which sparked speculation that the BoC would follow in the US central bank’s footsteps and hike 75bps at their July 13th meeting. Should inflation pressures remain elevated and show signs of broadening, markets may witness the first official signs that the BoC is entertaining a larger move as Senior Deputy Governor Carolyn Rogers is set to speak to media at 15:40 BST. Overnight index swaps are currently pricing in a 70bps hike by the BoC, meaning the CPI report could tip the balance and result in a more hawkish repricing. This could help the loonie offset pressure from the sudden downturn in global equities.