News & analysis


Sterling was under broad pressure from a resurgent US dollar in yesterday’s session, with the release of the latest batch of FOMC meeting minutes causing GBPUSD to take another leg lower. However, this morning the pound has stabilised along with the risk environment within markets. The dollar is softer against the whole G10 currency board as US yields moderate, causing sterling to trade 0.1% higher while the magnitude of gains are shared in EURUSD. In the news, Boris Johnson is seeking to assess how to best retain Covid-19 immunity with the government launching a trial of seven vaccines to see which can generate a successful immune response to act as a booster. The government is now looking at ways to effectively control the virus over the longer-term as it seeks to fully reopen the economy on June 21st. While the Indian strain of the virus caused concerns that the UK would have to slow the pace of reopening, PM Johnson stated that he has “increasing confidence” that vaccines are working against all variants when speaking to MPs on Wednesday. Today, economic events are sparse for GBP ahead of tomorrow’s retail sales data and preliminary PMIs, with just BoE member Jon Cunliffe speaking at the Law Society’s online Property Section Convention ‘Property review’, which is unlikely to provide market moving commentary.


The euro is struggling to fully recover this morning from the losses it sustained yesterday against the US dollar after yesterday’s FOMC minutes led to a bout of dollar strength. The pair is trading up 0.15% as some of the USD gains are reversed, however it continues to trade around half a percentage point lower than yesterday’s highs. Executive Board Member Isabel Schnabel stated in an interview with German broadcaster ARD this morning that the surge in eurozone inflation is temporary and prices should decelerate next year and added she sees no reason for an interest rate hike at the moment as the ECB will need to keep financing conditions favourable in order to support the economy. The comments came just before the ECB’s meeting minutes which are scheduled for release at 09:00 BST, however these are unlikely to provide markets with much new info ahead of the upcoming meeting on June 10. Yesterday’s yearly Financial Stability Review from the ECB highlighted that the central bank’s policy will need to stay accommodative, however, there are some risks to the outlook. The ECB highlighted concerns that the flood of fiscal and monetary stimulus needed to fight the pandemic is also building up dangerous imbalances, with Luis de Guindos seeing some segments of overvaluation. The ECB also stressed the elevated risks of high corporate debt burdens in countries with larger service sectors. The June meeting will be a test of the ECB that shows how concerned the Council is about the flood of stimulus and when they envisage a reduction of purchases via the pandemic bond-buying programme.


Last evening at 19:00 BST sharp, the greenback enjoyed a decent boost after the FOMC minutes suggested that some policy makers were ready to start the debate around the tapering of bond purchases if rapid progress in the economic recovery continues. Moves across currency, fixed income and equity markets were visible on the back of this, with Treasuries and stocks moving lower and stocks although it should not be a huge surprise. In March, four FOMC members forecasted rates to be hiked in 2022 up from zero members in December. In order for that to happen, the first signal of QE tapering can’t be delayed into next year as the whole process of tapering bond purchases also takes some time, and rates are only expected to be hiked after the tapering. Our USD outlook remains unchanged, as we still expect the first taper signal to be around Q3 and the first actual taper to be used at the turn of next year. The latest FOMC minutes suggest that Fed officials will want to kick start the conversation after a continuation in the strong data trend, which will likely take a few months to fully materialise in order to get enough officials on board, meaning our Q3 assumption for the first official sign of the tapering timeline remains viable. This morning, the US dollar softened slightly as the dust settled after the minutes release, although a surprise in the US jobless claims could bring a change to that after April’s Nonfarm payrolls stirred up markets. Jobless claims are expected to have slowed to 450k down in the week ending on May 15 after the prior reading of 473k.


It was one-way traffic for the loonie throughout most of yesterday’s session as USDCAD climbed 0.57% over the course of the day. While April’s CPI data did provide the loonie with a period of brief respite, as headline CPI rose from 2.2% to 3.4% to sit substantially above the Bank of Canada’s 2% target, the limited nature of the rally suggests that this was mainly algo related. The loonie quickly reversed gains to return to trading weaker against a broadly resurgent US dollar, mainly because the Bank of Canada has already stated that short-term inflationary overshoots won’t prompt a policy response; a similar stance to the Fed. Most of the inflationary overshoot was due to positive base effects as the year-on-year figure is compared to the onset of the pandemic when inflation fell 0.2%. On a month-on-month basis, inflation rose by 0.6% when seasonally adjusted, but this was largely due to a rise in input costs as commodity prices started to climb in April. Today, the loonie is retracing part of yesterday’s unwind as it trades 0.26% higher against the dollar with no idiosyncratic drivers. Commodity currencies as a whole are leading gains against the greenback this morning, with AUD leading gains in the G10 space. Today, the sole data point released is the Bank of Canada Financial System Review at 15:00 BST, with Governor Tiff Macklem set to speak after at 16:00 on the review. Given the heightened focus on QE as a means of correcting market functionality and the risks house price growth poses on broader asset stability, the review and comments by Macklem may provide markets with more insight into upcoming BoC actions.


The Australian dollar saw a significant but short-lived drop upon the release of the monthly employment data as overall employment surprised to the downside as 30.6k jobs were shed although the consensus foresaw a 20.0k increase in employment. This was coupled with a modest downtick in the unemployment rate as well, however, the lower participation rate in the overall figure underpinned the change in the unemployment rate as the participation fell 0.3ppt to 66.0%. The currency reaction was short-lived, and the Aussie dollar continued to firm against USD as the Asian session evolved and the London session started. While the unemployment data is key for the RBA, given their reluctance to hike rates before a sustained recovery in employment conditions are visible once government support measures are removed, the fact that the central bank has signalled it won’t hike rates until the distant future means the unemployment data holds less of an impact for markets at present. Next up will be Australian retail sales at 02:30 BST in the morning on Friday which will give markets a little taste of what consumption looks like in the post-lockdown era.



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