News & analysis


As pointed out in yesterday’s morning report; the pound was one of the better performing G10 currencies in yesterday’s session. Ultimately, sterling topped the G10 currency board over the course of the day as it registered a 0.3% gain against the dollar as economic sentiment improved in the afternoon session and fix-related buying nudged GBPUSD higher. The pound continues this morning on a strong footing as economic optimism persists with the UK’s services sector now largely reopened, albeit with capacity constraints in place. Key economic events yesterday centred around Bank of England MPC member Gertjan Vlieghe who said that negative rates will be in the toolbox as of August. The comments about the operational timeline of negative rates came in a relatively dovish discussion by the MPC member, who stated the UK economy still “needs a lot of stimulus”. Speculation over negative rates being implemented by the BoE has largely fizzled out in money markets, but MPC members, namely those on the dovish side, continue to point at the possibility of more monetary stimulus should demand drop-off from the initial pace of the rebound. This morning, the economic data calendar saw labour market data for March released, with the ILO unemployment rate dropping marginally from 4.9% to 4.8% over the rolling quarter. This is largely due to the 84,000 jobs added over the same period as business confidence spurred an expansion in the labour supply with reopening scheduled from mid-April. The recovery was driven by a 1.2% increase in full-time roles, while part-time employment fell by 2.0%. The labour market data still isn’t the most representative due to the impact of the furlough scheme, however, the initial signs are there that it is beginning to heal as the economy reopens. We expect job gains to continue in the coming months, with May’s reading largely focusing on part-time employment gains. Early estimates from the PAYE data shows the number of employees rose 0.3% MoM in April, reducing the decline since the January 2020 peak to 2.7% from 3% in March. Today, BoE Governor Andrew Bailey and Deputies Ben Broadbent and Dave Ramsden speak at the Lords EAC hearing on QE at 15:00 BST, but the event is unlikely to provide any fresh information for FX markets as the pound sits 0.4% higher this morning and eyes a key psychological level.


The euro has been edging higher against the dollar in the past four trading sessions, including this morning, although Thursday to Monday’s share of the price action stemmed from the US dollar paring back gains from last week. This morning, however, the pair carved fresh highs not seen since February after German Bund yields traded at their highest levels since May 2019, which puts in question the European Central Bank’s Pandemic Emergency Purchase Programme which was ramped up since March to combat the rise in bond yields. The move in Bunds combined with ongoing USD weakness from a risk on market mood resulted in the pair breaking through earlier highs this morning. Global virus headlines have yet to impact the euro as the acceleration in domestic vaccinations and the prospect of further lockdown easing support the currency. Italy’s government approved a decree on Monday pushing back with immediate effect the nightly curfew from 10pm to 11pm. On June 7th, the curfew will be moved by another hour and will be abolished altogether from 21 June onwards, according to a statement, in line with the plan to gradually ease other restrictions. Italy has seen daily case count and hospitalisations declined in recent weeks as more people are being vaccinated, which bodes well for a return to normal life going forward. Today’s economic calendar includes euro area Q1 GDP and employment figures at 10:00 BST, with GDP expected to have fallen by 0.6% QoQ and 1.8% YoY in the first quarter of the year as lockdowns throughout the bloc pushed down on output. A larger than expected contraction may put downward pressure on the euro, although it should not start a new bearish trend as the data is lagged and Q2 data is likely to reflect the easing of lockdown measures.


Yesterday’s session included broad-based USD selling that was extended into this morning amid a more supported risk-on tone. While there are no fresh catalysts this morning to support the improved risk environment, it likely follows on from reopening plans in Europe and a push for further reopening in the US yesterday. The DXY index has been consistently falling over the last four days after last week’s data from the US and corresponding price action in currency and fixed income markets suggested that the rise in nominal yields had not spilt over into real yields yet as the rise was solely based on high inflation expectations rather than interest rate hike expectations. The US’s strong string of economic data continued yesterday, with the empire manufacturing index for May outstripping expectations to print at 24.3, down 2 points from April’s reading, while the NAHB housing market index remained stable at 83 in May. On the Fed side, yesterday at the Atlanta Fed Conference, Vice Chair Richard Clarida reiterated the central bank’s consistent view that it is no time to start talking about QE tapering. He discussed the April employment report that shows the US has “not made substantial further progress”, while stating that the current inflation pressures are transitory. This was largely expected by financial markets as FOMC officials have been broadly singing from the same hymn sheet, which is why real yields have failed to tick up just yet. Meanwhile, Dallas Fed President Robert Kaplan, who sits on the more hawkish side of the spectrum, reiterated the need to withdraw stimulus in the form of QE tapering in order to offset excesses in financial markets and the economy that can result in unintended consequences. Kaplan, having announced himself as one of four Fed members to signal a rate hike in 2022 in the Fed’s latest dot plot, states nothing markets didn’t already know in yesterday’s commentary. Today, the data calendar is light, with Kaplan the only Fed member to speak again today at 16:05 BST.


The loonie was the second-best performer in yesterday’s session within the G10 space, lagging sterling ever so marginally. A boost in risk sentiment and economic optimism in the afternoon session spilt over into commodity markets, with the Bloomberg commodity index jumping 1.4% on the day, its largest gain in a month. Higher oil and gold prices lifted the loonie, along with other industrial materials, with the Canadian dollar closing out the session near a 6-year high. This morning, economic sentiment continues to be strong, with the supercycle in commodities continuing as highlighted by iron ore, whose futures for June 2021 have climbed 3% this morning. This has all driven the loonie to extend its recent gains and carve fresh highs against the dollar as it moves towards levels not seen since May 2015. There is little pencilled in today in terms of Canadian economic events, meaning the loonie is susceptible to broader market dynamics such as developments in commodity markets and how the broad US dollar is trading.



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