News & Analysis


Yesterday’s global bond rally, which saw yields fall, helped the pound rally along with other G10 currencies against the dollar. GBPUSD rallied over half a percentage point in yesterday’s session, with the pair remaining in recent trading ranges. Against the euro, which is more sensitive to developments in US Treasury yields, the pound struggled to keep up, resulting in GBPEUR falling one-tenth of a percentage point. This morning, as markets become increasingly more bullish on ECB policymaking, much of the action for the pound is being channelled through GBPEUR, with the pair trading 0.35% down at the time of writing. Today, the economic calendar finally comes alive for the pound as Bank of England policymaker Catherine Mann speaks at 14:00 BST, with Governor Bailey speaking at 17:30 BST.


The euro found some support in comments from European Central Bank member Martins Kazaks yesterday when he said the ECB may raise rates as soon as July amid significant inflation risks that will probably require further tightening later in the year. This morning, when leaning dove and voter Luis de Guindos echoed that a rate hike in July is possible, depending on the data, the euro took off and rallied against all G10 currencies. Inflation in the eurozone sits at a record 7.5% and is still rising, adding pressure to policymakers to press ahead with normalisation. Money markets are now pricing in three quarter point rate hikes by the ECB in 2022, compared to around 60bps of hikes baked in last week. Still, the economic fallout from the war in Ukraine means the ECB is moving with caution, but for now, the more bullish market pricing of ECB policy is helping lift the single currency. Later this evening, ECB President Lagarde will take part in a global panel discussion hosted by the IMF.


The US dollar weakened across the board yesterday amid a moderation in 10Y Treasury yields and a halt to the rise in the 2Y yield. The rally in US bonds, which lowered yields, is notable as the 10-year yield approached the key psychological 3% level and US real yields, which are adjusted for expected inflation, rose into positive territory over the 10Y horizon. With the broad dollar DXY index rising over 2.5% in April up until yesterday’s open, largely due to rising US yields, the stall in the ten-year prompted a period of consolidation. Comments from San Francisco Fed President Mary Daly failed to lift US yields yesterday, despite stating that she sees a case where a 50bp hike is solid and added that balance sheet reduction will certainly be announced at the May meeting. While Daly is not a voter this year on the rate-setting FOMC, she became the latest FOMC dove to join the chorus calling for a 50bp hike next month. On the geopolitical front, the US imposed further sanctions on Russia as security agencies from the US and other countries warned Moscow is looking at options for cyberattacks. Meanwhile, commentary stemming from the G20 meeting in Washington has been limited, especially after the staged walkout by western representatives yesterday as Russian delegates began to speak. Today, the dollar continues to drift downwards despite a retracement in US Treasuries. Commentary this evening at 18:00 BST by Fed Chair Powell, who joins ECB President Lagarde and Indonesian Finance Minister Indrawati in an IMF panel discussion, will be key to see if the dollar continues to drift lower towards the end of the week.


Yesterday’s release of March’s CPI saw inflation rage past everyone’s expectations, beating both the Bank of Canada forecasts and every analyst surveyed by Bloomberg. The 6.7% YoY print saw headline inflation surge 1 percentage point higher than February’s reading, while the MoM gain of 1.4% was the fastest since January 1991 when Canada imposed its goods and services tax. The massive inflationary surge was driven by an 11.8% monthly increase in the price of gasoline, which spiked after Russia’s invasion of Ukraine led Western countries to self-sanction the supply of Russian oil. While the bulk of the inflationary impulse was imported, reflecting international economic developments, domestic inflationary pressures were also elevated. The average of the Bank of Canada’s preferred indicators of core inflation rose from 3.53% to 3.77% YoY, while the price of services rose 0.6% MoM, which if sustained, would compound to a 7.4% annual gain. That raises the impetus for the Bank of Canada to tighten its monetary policy. Money market pricing for the BoC fluctuated heavily after the CPI release and at points saw a 50bp hike in June become fully priced. This morning, however, expectations have moderated somewhat due to the six-week gap that remains before June’s meeting, of which includes the release of April’s CPI report. The initial spike in implied rate hikes, however, pulled short-term Canada government bond yields roughly 6 basis points higher even as yields fell worldwide, helping the loonie strengthen a full percent against the dollar over the course of the day.



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