News & Analysis


Aided by depressed valuations, the pound buffeted the pressure from the dollar yesterday to finish the session 0.36% higher on the day, with most of the rally occurring in the late afternoon of the session. This morning, as the risk environment remains tentative, the pound is again sitting close to the top of the G10 currency board despite growth concerns dominating the cross-asset narrative. Sterling could be supported by further fiscal measures to prop up UK households today as Chancellor Rishi Sunak is expected to announce at least some measures to offset the cost of living crisis at 11:30 BST. Focus will be on how the estimated £10bn package will be dished out to the consumer and the impact windfall taxes have on energy stocks.


Despite continued hawkish commentary from ECB officials in yesterday’s session, the single currency retraced some of the 1.6% rally notched over the previous two days. The pressure on EURUSD largely came from lower equity prices throughout the session, with losses trimmed only slightly after the release of the Fed’s May meeting minutes. We expect the ECB’s reiterated hawkish message to continue to support EURUSD, and in turn fight off the parity calls in the near-term, however, with market pricing already full for the ECB this year, we don’t expect commentary by policymakers to add too much more upside for the euro in this current environment. Today, the calendar is light for the eurozone, with just Italian sentiment measures for May released at 09:00 BST.


The dollar started yesterday’s European session on the front foot, but around the NY open and the release time for durable goods data, the dollar topped out as bond yields hit lows on the day. While the retracement in the dollar’s price action was marginal, it set the tone for the rest of the day as growth concerns were somewhat contained. US cash equities then opened higher, setting the tone for a mild rebound in US equity indices. While the focus for yesterday’s session was the release of the Federal Reserve’s May meeting minutes, the publication was largely a non-event for FX market, having all but confirmed the market expectation that FOMC members prefer 50bp rate hikes in June and July. Overall, the discussion was focused on maximising the Fed’s optionality after reaching a neutral rate, indicating that adjustments to the pace and scope of tightening would be made in response to the strength of incoming data. Aside from that, the most interesting information in the minutes was that Fed officials disagreed with each other on whether to view inflation expectations as calming or worrying. The source of disagreement stems from the divergence between short and long-term expectations, since short-term inflation breakevens are running well-above the Fed’s 2% target, while longer-term ones are more strongly anchored. Despite some discussion about taking rates into restrictive territory, the minutes failed to stem the dollar’s slide yesterday evening. However, concerning commentary from the head of the PBOC, Li Keqiang, over the outlook for the Chinese economy has brought growth concerns back to the forefront for global markets this morning. A drop in global bond yields and a broad bid in haven currencies has since ensued. Today, the second reading of Q1 GDP at 13:30 BST is the standout scheduled event for the dollar.


The loonie fell 0.4% at the start of Wednesday’s session, however, a positive risk tone that saw equities climb upon the US cash open resulted in the Canadian dollar retracing losses against the greenback. The move in the Canadian dollar broadly mapped that seen in other G10 FX pairs, with the loonie trading in a tentative manner this morning as growth concerns linger and US equity futures teeter on the edge of pointing substantially lower. Today, the Canada’s economic calendar is finally populated, with the CFIB business barometer for May released at 12:00 BST before the SEPH payroll data and March’s retail sales at 13:30 BST.

FX Elsewhere – rate cuts in Russia

The Central Bank of Russia announced yesterday that it would hold an extraordinary meeting today to consider the policy level. This would be the third extraordinary meeting since the invasion of Ukraine and is likely to follow in the footsteps of the last unscheduled announcement, held on April 8th, which saw the Key Rate get cut from 20% to 17%. This time around, the consensus is for a smaller rate cut, from 14% to around 12%, as the central bank looks to boost growth conditions now the financial stability risks have diminished. That is, capital controls have effectively worked in stabilising deposit withdrawals, while inflation has slowed substantially given the recovery in the ruble under the current monetary policy framework and international sanctions. While it would be in the government’s best interest to offset some of the recent RUB appreciation in order to boost commodity revenues, with the capital account effectively closed, rate cuts by the CBR are unlikely to weaken the currency. Instead, the reduction in emergency measures is likely to be focused on improving domestic growth.



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