News & Analysis


Sterling was dragged higher by broader market pricing yesterday as the dollar slipped with front-end US Treasury yields. The inflation backdrop in Europe, as highlighted by yesterday’s German and Spanish CPI figures for March, is keeping two-year Gilt yields stable around the 1.35% handle at a time when US yields are starting to moderate. The improvement in GBPUSD’s yield differential and a reluctance by traders to force a larger breakout in EURGBP resulted in sterling joining the euro in notching further gains against the dollar in yesterday’s session. GBPUSD ultimately closed the day 0.3% higher. Data out of the UK this morning focused on the March business barometer from Lloyds, which dropped from 44 in February to 33, along with the final reading of Q4 GDP, which was revised up from 1% to 1.3% QoQ. The upwards revision wasn’t all positive though. Increased growth in the fourth quarter was driven by rising inventories as consumer spending was revised down from 1.2% QoQ to 0.5% along with government spending which was reduced from 1.9% QoQ to 1.5%. Rising inventories isn’t a sustainable source of growth, meaning today’s GDP revision is unlikely to give the BoE an increased level of comfort in their fight against current inflation conditions.


Yesterday’s CPI figures from Spain and Germany turned the inflation outlook even more worrisome in the eurozone and helped to underpin EURUSD. Meanwhile, the single currency also benefited from improved risk sentiment. German numbers came in at 7.3% YoY and 2.5% MoM, over 1% higher than the consensus had foreseen and nearly 2% higher than in February. Earlier in the morning, Spanish figures also showed a circa 2% increase on the month. European Central Bank President Christine Lagarde commented on the economic outlook yesterday too, discussing the significant risks to growth and considerable uncertainty over the outlook. While the President of the central bank has refuted the idea of stagflation up until now, yesterday’s news that Germany and Austria have taken the first formal steps towards gas rationing has only exacerbated stagflation fears further. If Russian supplies continue to fall short and the attempt to fulfil demand from alternative supplies fails, the government would restrict German manufacturers from the gas network and reserve that gas for households instead. This morning, French CPI figures also printed to the upside at 4.5% YoY and 1.4% MoM, although the situation looks less dire in France than in neighbouring countries. Meanwhile, German retail sales came in softer than expected at 0.3%, but these don’t fully capture the shock of the war in Ukraine as the figures are from February. Looking ahead to the rest of the day, eurozone unemployment rate and Italian CPI at 10:00 will be eyed.


The greenback continued to trade lower in yesterday’s session despite there being no breakthroughs in negotiations between Russia and Ukraine. In addition to the stagnating peace talks, Nato members warned that there are still no signs of withdrawal of Russian troops. The dollar failed to benefit from the moderation in the risk backdrop, however, as US bond market traders proved reluctant to drive US front-end yields higher at the risk of inverting the curve again. As yields rose elsewhere within the G10 space, improving rate differentials pushed the dollar lower. Overnight, global crude benchmarks shed around 4% after the US is said to be considering a release of a million barrels a day from reserves to combat inflation and supply issues. President Joe Biden will speak later today and may address the plan in his speech, however, at just one million barrels per day the supply increase is very limited in nature and is unlikely to provide too much of a tailwind to commodity currencies. The US is also seeking some agreement among allies to coordinate a global release and counter the rise in prices. This would ultimately drive oil prices even lower than current levels if the plan goes ahead. Today, markets will watch US personal income and spending figures for February at 13:30 BST along with initial jobless claims and a speech by Federal Reserve’s John Williams at 14:00.


The Canadian dollar closed slightly stronger than the day before on Wednesday, but closing prices don’t tell much of the story. After the North American open, the loonie rallied hard, crashed, and partially retraced, all within the span of a few hours on the back of Russia-Ukraine headlines. This market has been both naive and fickle to geopolitical developments, and yesterday’s CAD price action is a testament to that. Signs that the war could de-escalate have typically led to a swift repricing in CAD followed by a retracement as those signs turned out overly optimistic. Nevertheless, sudden, volatile moves can be a boon to investors aiming to limit their foreign exchange risk since they create more entry points for those wishing to hedge at a specific price. Today, conditions for CAD should be more navigable as focus reverts back to whether oil benchmarks can keep their nose above $100 per barrel and the Canadian data calendar. Today, StatsCan releases January GDP along with a preliminary estimate for February at 13:30 BST. Preliminary January estimates suggested the economy grew 0.2% that month with gains concentrated in retail, construction, finance and insurance, and notable losses in manufacturing, oil and gas extraction, and client-facing services due to public health measures.

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