The announcement of a further £15bn financial support package for households by Chancellor Rishi Sunak yesterday didn’t have the immediate intended impact for GBP bulls. Despite increasing the universal support for households by £200 in October to bring the total payment to £400, while also changing the terms of the fiscal transfer from a loan to a grant and providing further support for more vulnerable households, the pound fell 0.5% against both the dollar and euro. In theory, the measures should provide the Bank of England with a more stable consumer demand backdrop to hike rates, and therefore should have been GBP positive. However, markets were yet to fully discount the Bank of England’s implied rate path, meaning there was little upside to GBP rates from the announcement to spur the pound higher. While the improvement in the broad risk backdrop helped GBPUSD retrace its early lunchtime losses and close out the day higher, the pound failed to recover against the euro.
The more hawkish pricing of the ECB and the reduction in the expected number of interest rate hikes from the Fed has helped EURUSD rally over 4% since it hit fresh multi-year lows on May 13th. The momentum in the euro rally was extended yesterday as the bid in US equities helped extend the “feel good time” for the single currency. However, the recent euro rally may start to top out in the near term, as pricing for the ECB’s policy path reaches a plausible limit for 2022 and downside risks to the Fed’s implied path diminish with the latest repricing. Additionally, downside risks to the eurozone economy are still prominent. News today highlights these risks, as the EU’s energy commissioner tells the FT that Europe is developing contingency plans in the event of a complete breakdown in Russian gas imports. Trading 0.2% higher this morning, the challenges to the euro rally may start today as both European and US equity futures trade in the red this morning. On the eurozone economic calendar, a speech by ECB chief economist Philip Lane at 12:35 stands out as the sole event to keep an eye on for markets.
Yesterday marked another session where broad risk appetite defined how the dollar traded across the G10 space. While the Antipodean currencies traded relatively flat due to lingering growth concerns in China, other high beta currencies within the G10 received a welcome boost from how US equities traded. The S&P500 closed out the day some 2% higher, with gains in the beleaguered NASDAQ exceeding two and a half percent. The broad bid in risk assets saw the euro and Canadian dollar sit close to the top of the G10 pile, with just the Norwegian krone exceeding their gains. The bid in risk assets came amid a further downgrade to US Q1 GDP, as the second reading saw the annualised QoQ figure reduced further from -1.4% to -1.5%. However, the growth concerns, which in fact are limited in the US as the Q1 data was mired by the trade balance more than anything, were outshone by the market pricing in the prospect of a more dovish Federal Reserve. Year-end pricing of the federal funds rate, as implied by overnight index swaps, has dropped some 14bps this week to 2.63% as the combination of growth concerns, poor housing data, and dovish commentary from Fed member Bostic posed questions for the previously hawkish pricing. Speculation over a more dovish rate profile in the US is exemplified by Bank of America’s latest rates call, which suggests receiving September’s OIS position to bet on a pause in the Fed’s hiking cycle after July’s meeting. The bid in US equities yesterday has extended over to Asian markets, with a regional gauge of Asian shares poised to rally for the first day in four to the extent that it closes out a second week of gains. In turn, this has boosted APAC currencies this morning ahead of the European open. Data today will come in the form of personal spending, with the Fed’s favoured measure of inflation, PCE, set to be printed for April alongside personal income and spending data at 13:30 BST.
It was all about US equity markets for the loonie yesterday. After trading on a slightly weaker footing overnight, the loonie quickly surged at the US cash open (09:30 ET/ 14:30 BST) as North American equity indices climbed. With the rebound in shares extending throughout the day, the loonie continued to grind out gains until it ultimately closed out the day 0.35% higher and towards the top of its recent range. This morning, with the risk environment still supported by positive Asian equity performance overnight, the loonie continues its surge higher as it now trades at levels not seen since May 5th, however, today’s rally may begin to fade as US equity futures suggest today’s session may see a slight retracement in yesterday’s rebound.
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