News & Analysis

GBP

Although intraday volatility is high, the pound is struggling to break out of its recent 1.68% range despite testing both boundaries over the past four days. Broader market conditions are largely driving the pound in our view, despite the deluge of economic data released out of the UK this week. This morning’s price action is testament to this. While the GfK consumer confidence measure for May collapsed to a record low as consumers feel the pinch from higher inflation and the details within the April retail sales data weren’t as constructive as the headline figure suggested, the pound still trades marginally higher against both the dollar and the euro on the day. While this can partly be explained by the depressed valuation in GBPUSD due to the recent depreciation, sterling’s performance this morning is also in line with the more constructive risk backdrop seen in the cross-asset space. With nothing else scheduled in the UK in terms of economic events today, the broader market backdrop will be key for the pound and the prospect of it breaking out of recent ranges.

EUR

The single currency rose in line with the broader G10 move yesterday. The rally in the euro came amidst the release of the ECB’s April meeting minutes, which reaffirmed the hawkish commentary that has come from ECB members of late. Within the minutes, concerns over rising inflation were paramount, with most members calling for the removal of an accommodative policy stance. With a July rate hike now set in stone, the only question for markets is how much will the Governing Council raise rates. Money markets are currently pricing in 33bps of tightening, up from just 25bps on Tuesday. This suggests that the possibility of a larger 50bp hike isn’t being struck off just yet. If this scenario grows in likelihood, it should further support EURUSD around current levels.

USD

Price action in G10 FX yesterday was perplexing on the surface as the dollar’s usual risk-off moniker looked to have been threatened. While price action in the cross-asset space suggested it was another firm risk-off day, as equities fell further and yields sank on increased bond demand, the dollar weakened against the whole of the G10 currency board. However, for most G10 FX pairs, the dollar weakness didn’t result in new ranges being carved. This to us suggests there may be some fading of the long dollar position, as the risk-off pricing in other markets is no longer a shock to traders, but it doesn’t necessarily signify a new trend of dollar weakness is coming down the line. This morning, risk conditions in markets are better supported as China’s National Interbank Funding Center cut the 5-year Loan Prime Rate by 15bps to 4.45%. Although the decision by major Chinese banks to cut the 5-year LPR more than expected signified the bleak macroeconomic outlook in China, especially for the property market, it highlighted that policy support was incoming. This enabled the Chinese yuan to rally nearly 0.5% overnight, helping calm fears of continued CNY depreciation on the back of lower growth conditions. Today, the data calendar is light for G10 markets, meaning the focus will likely rest on the final day of the G7 meeting of finance chiefs in Bonn.

CAD

The loonie appreciated by half a percent in yesterday’s session, lagging behind most currencies in the G10 as they rose against the US dollar. The seemingly risk-on pricing in G10 FX markets was strange seeing as it didn’t align with the broader risk-off pricing in other markets, such as equities, but we are hesitant to call the end of the dollar’s strength on haven flows. From a fundamental standpoint, the loonie’s rally was supported by a slight reduction in market implied volatility. The “market fear gauge”, or VIX index, fell below 30 to 29.35, suggesting that lessened though still elevated levels of near-term market volatility are now priced in by the equity options market. Furthermore, WTI rallied some 2.4% to $112.21 during the day. This morning, the loonie continues to eke out further gains as commodity currencies lead the charge against the dollar as the first signs of substantial growth stimulus are announced in China. For Canadian traders, today marks the last business day before the long weekend, meaning that volatility in USDCAD may pick up as positions are squared ahead of the market holiday on Monday.

 

 

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