Dollar drops on potential trade war unwind

GBP

After continued rangebound volatility last week, the pound has broken higher this morning against the dollar to trade at levels last seen prior to the Bank of England’s meeting on May 5th. Sterling’s rally this morning has largely been due to the improved risk backdrop in markets as very little news circulated about the UK economy over the weekend. The only notable event on the UK economic calendar this morning is commentary from BoE Governor Bailey at 15:15 BST.

EUR

The single currency has been dragged higher this morning by the improved risk backdrop, with EURUSD now trading around levels last seen before the break lower and discussion around EURUSD parity came to fruition. The surge in the single currency is welcome news for ECB officials, who have recently changed tact to openly discuss how a weak euro could exacerbate the region’s already weakened economic profile. While until now, markets have largely shrugged off comments by ECB officials, the increased vigilance by policymakers is likely providing a floor underneath EURUSD. Today, the economic calendar centres on May’s IFO sentiment data out of Germany at 09:00 BST along with comments from Governor Council members Holzmann and Nagel at a conference on “the return of inflation” at 15:15 BST.

USD

After strengthening on Friday amid news that US equity markets could enter a technical bear market, the dollar has resumed trading on a weaker footing at the start of the week. Over the weekend, news that US President Biden and Treasury Secretary Yellen will review the import tariffs on Chinese goods levied by the Trump administration has helped support risk appetite. Commodity currencies with strong trade links to China, such as NZD and AUD, are leading gains amid the more supportive risk environment. Today, the data calendar is light for the US, with just Fed’s Bostic discusses the economic outlook at 17:00 GMT. Meanwhile, President Joe Biden will meet with the leaders of India, Japan and Australia at the Quad security partnership and the World Economic Forum is set to begin in Davos.

CAD

Like other procylcical currencies, the Canadian dollar has broken higher this morning as news of the US potentially lowering trade restrictions with China is helping buoy risk appetite. However, unlike other G10 currencies, the loonie will be trading today without support from onshore markets as most provinces in Canada celebrate Victoria Day. The national holiday means both domestic equity and bond markets will be closed for trading.

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