News & Analysis


Has the pound peaked? Yesterday’s price action seems to suggest so as GBPUSD traded at just over a one-month high, however, the pair struggled to consolidate recent gains as the market risk backdrop deteriorated. Sell-side analysts from major banks, including Bank of America, have come out recently to outline their bearish case for GBP going forward. Noting Brexit risks, current account dynamics, growth risks due to the cost of living crisis, and the difficulty in predicting the Bank of England’s actions, the bearish case for GBP is only building as investor sentiment around the pound is at its worst in 10 years. A slowdown in the housing market isn’t adding to this list, not just yet at least. Nationwide house price data for May, released at 07:00 BST this morning, showed prices increasing 11.2% YoY. While this is a 0.9% reduction from last month’s headline reading, the monthly pace of price gains actually picked up from 0.4% to 0.9%. Despite the resilience in the housing market, we expect the squeeze in household incomes and higher interest rates to start weighing on mortgage applications and thus housing demand in the coming quarters.


European leaders wrapped up a two-day summit yesterday after agreeing to pursue a blanket ban on Russian seaborne oil imports. The impact of the news on EURUSD was minimal, largely due to the ease of substituting Russian oil for other energy sources for most EU nations. Instead, the single currency focused squarely on the pressure that was re-exerted on the broader market backdrop as equities wiped out some of their recent gains. On the domestic data front, the EU-wide inflation print hit a record of 7.3% while the French economy contracted 0.2% quarter-on-quarter in Q1. The inflation data had little impact on market pricing as German and Spanish CPI readings on Monday prepared markets for a hot inflation print. Meanwhile, the Q1 GDP data out of France highlights the growth risks in the eurozone economy. Given the increased pressure on the consumer from inflation in Q2, it is likely the French economy is undergoing a technical recession as we speak. Today, the single currency continues to trade on the back foot as the dollar extends its bounce back. Germany’s April retail sales aren’t helping the single currency to rebut the broadly stronger dollar, however, as they printed aggressively below expectations at a whopping -5.4% MoM. For the remainder of the day, manufacturing PMIs are released, while progress reports from the ECB and the EU’s executive arm will give markets an update on how close Croatia is to becoming the 20th member of the euro-area.


Like Novak Djokovic in the second set against Rafa Nadal last night, the dollar posted a sharp turnaround in yesterday’s session as US Treasury markets opened substantially lower. The retracement in the dollar came after three consecutive days of USD weakness and a 3% drawdown from the DXY index’s peak in the middle of May. However, normal service quickly resumed as higher Treasury yields, which began in the overnight session but persisted throughout the day, weighed on global equities and therefore risk sentiment in the FX space. The spike in yields resulted from Fed Governor Waller’s comments on Monday, where he stated that 50bp hikes could take place at ‘several meetings’, suggesting the faster pace of tightening may persist beyond the already signalled June and July events. With upside in US Treasury yields still visible, despite concerns over growth conditions, today’s comments by perma-bull James Bullard at 18:00 BST may be the decisive moment for FX markets. However, if Bullard’s comments are to have an effect, May’s ISM manufacturing data at 15:00 BST will have to show a stable economic backdrop and not allude to a cooling down in price pressures and employment intentions.


Despite the downturn in risk-sensitive G10 currencies yesterday, the loonie continued its recent rally into month-end against the dollar to close out the month 1.25% higher. While the strong relative performance of CAD in yesterday’s morning session can be largely explained by a stronger oil backdrop, the loonie looks to have consolidated its gains on a technical basis after WTI slipped in the afternoon to wipe out its earlier $5 rally. Today, CAD traders will face up to the Bank of Canada as the central bank is broadly expected to hike rates by 50bps to 1.5% at 15:00 BST. With 20 of the 21 qualified economists polled by Bloomberg foreseeing a 50bp hike and with no immediate press conference after the announcement, the actions of the BoC today are likely to have a limited market impact unless they deviate from consensus. However, in the probabilistic event that the BoC hikes as expected, traders will still scour the wording of the BoC’s press statement to get an updated view on how the Governing Council reads the current conditions in the Canadian economy ahead of tomorrow’s economic progress report from Deputy Beaudry.



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