Price action in the pound was fairly muted yesterday, with most of the action centred on the broad US dollar’s reaction to fixed income developments. Today, in lieu of domestic economic events, the dollar continues to dictate the pound’s performance. With yield differentials front of mind for FX markets given recent Fed commentary and price action in US Treasuries, the announcement of the spring budget tomorrow may prove pivotal. The Bank of England recently embarked on a dovish hike, owing to the risks to the growth outlook. Should the latest fiscal injection shelter growth conditions from what is set to be the worst cost of living crisis in decades, monetary policymakers may feel more comfortable in hiking rates to thwart inflationary pressures. This should, along with tomorrow’s release of February’s CPI data in the morning, offer the pound a modicum of support in the fight against rising US yields.
While yesterday’s European Central Bank commentary failed to prop up the euro as Jay Powell’s comments took the upper hand in markets, today’s session could see renewed volatility in EURUSD on the back of ECB commentary as there are six ECB speakers scheduled for today. Amongst those are President Lagarde and Chief Economist Lane at 13:15 and 17:00 GMT respectively, both of which are more dovish than the majority of the speakers from yesterday. This means markets could react more evidently to any hawkish commentary from them, as this would indicate a shift in the ECB’s main views. On the fiscal front, markets will watch possible measures regarding intervention in energy markets tomorrow after a draft legal text was seen by Europe Express following yesterday’s EU council in Brussels. The draft text sets out an obligation to fill up gas storage facilities and would amend EU legislation on gas security of supply from 2017. By filing up its gas storage facilities, the bloc can avoid major supply disruptions next winter when energy demand rises again. Substantial progress on measures could prop up the euro in the more medium-term as this would reduce inflationary risks.
It was calm before the storm yesterday as markets were virtually motionless in the run-up to Fed Chair Powell speech at the National Association for Business Economics. Headlines following his commentary led to a moderate bid on the US dollar as the US Treasury sell-off deepened. Powell indicated the Fed is prepared to hike interest rates by 50bps in May, if the data allows, which drove yields on front-end Treasuries to one of their worst days in a decade. The comments come after the FOMC hiked rates by 25bps in its meeting last week and signalled another 6 quarter point rate hikes throughout 2022; a major shift in the FOMC consensus since the December projections. This morning, the two-year yield moved off of overnight highs but continues to trade above 2.15% – this is seismic given front-end yields struggled to break above 2% last week. Looking ahead to today, the data calendar is fairly light but a number of Fed speakers will be eyed for monetary policy guidance. These include Wuerffel, William, Daly and Mester throughout the evening.
The market for Canadian dollars was fairly calm yesterday, except at midday in North America when Fed Chair Powell spoke at a conference hosted by the National Association for Business Economics. Powell emphasised that the Fed’s decisions rely on incoming data, and that if it were warranted, the Fed could move in bigger-than-25bp increments or even tighten beyond the neutral rate. Markets perceived Powell’s tone as hawkish, with his comments inducing an initial sell-off in equities and a rally in the broad US dollar as yields stretched higher. The market reaction is telling as Powell provided no new information relative to last week’s press conference; he merely reiterated that the Fed isn’t bound by 25bp increments and that strong data will warrant larger moves. Savvy traders quickly smelled mispricings and seized the opportunity to send the dollar bid, pushing USDCAD back above key support levels. However, the loonie also received support yesterday from oil and its own bond yields, with WTI up 7.4% and the 2Y yield up 14.4bps. This morning, volatility in the USDCAD pairing is minimal, but will likely pick up once US markets open. On today’s calendar, we have producer prices out of Canada and the Richmond Fed manufacturing index out of the US. The Fed’s Loretta Mester will also speak at John Carroll University at 21:00 GMT.