News & Analysis


GBPUSD closed yesterday’s session roughly unchanged despite the mild downward surprises in UK GDP data for February in the morning, ahead of more tier-1 data releases this week. This morning’s jobs data from February showed the ILO unemployment rate dipped to 3.8%, back to pre-Covid levels, while average earnings rose in line with expectations to 5.4% YoY in the last three months. Payrolled employment rose by 35,000 in March, a downside miss, however, given most of the headline numbers and wage growth are in line with expectations, the market impact was limited. SONIA futures, which display expected interest rates in money markets, are therefore also expected to remain roughly unchanged when the market opens later this morning. The data is unlikely to stand in the way of tightening by the Bank of England. For the remainder of the week, the focus will be on UK retail sales on Wednesday and CPI data on Thursday.


The euro is under renewed pressure this morning as markets are bracing for increased hostility in eastern Ukraine after headlines reported Russian forces are regrouping to target the Donbas region. Ukraine’s allies in Europe are moving to arm Kyiv to repel Russian forces and to further pressure President Putin after six weeks of sanctions have done little to ease the war. Poland’s prime minister predicted Europe would soon see its biggest tank battle since World War II, after which EU member states urgently called for more weapons to be shipped to Ukraine. Some EU states, including Poland and Baltic nations, are pressing for an embargo on Russian oil imports, but resistance from others remains as there are concerns sanctions on oil will damage EU economies more so than Russia’s. However, this remains a risk in the near- to medium-term and could add a new dimension of weakness to the euro.


Charles Evans, head of the Chicago Fed, made headlines yesterday after saying to the Detroit Economic Club that a 50bp interest rate hike in May is “obviously worthy of consideration, perhaps it’s highly likely.” This comment is significant because Evans, while ineligible to vote on FOMC policy in 2022, is known to be one of the Fed’s more dovish officials. Nevertheless, his comments should not be over-interpreted based on the quote above, which were lifted directly from a Wall Street Journal article. Evans said that a 50bp hike was highly likely “if you want to get [to neutral] by December,” which is a faster pace than Evans backs himself. Regardless, with markets biased towards more aggressive Fed tightening, Evans’ comments proved confirmatory and sent the dollar bid with 10-year Treasury yields. The White House warned that the US inflation release today will be extraordinarily elevated. Consensus sees CPI jumping 8.4% YoY in March, according to the median of forecasts submitted to Bloomberg, marking the fastest pace of price growth since 1982. Surging energy prices and supply chain disruptions due to the war in Ukraine are expected to have added to already high inflation, while China’s lockdowns also weigh on supply. Arguably, market pricing of interest rate hikes is soon to top out as markets are already expecting a rate hike at every single meeting this year and foresee larger hikes of 50bps too. Instead, today’s USD price action is more likely to stem from moves in back-end yields such as the 10Y Treasury yield. These would rise further on a strong inflation print, and signal to markets that the Fed’s quantitative tightening will not only occur at a faster pace than in the previous cycle, but also faster than currently communicated by the Fed. This is due to the Fed’s balance sheet having a longer average maturity, such that any reduction in demand at these time horizons will lead to a lower price and thus higher yield. In comparison, the shorter-term yields like the 2Y Treasury yield reflect interest rate expectations more so than expectations around the Fed’s balance sheet.


The Canadian dollar fell by half a percent against the US dollar on Monday as markets shunned risky assets in favour of safer holdings. US equities tumbled with the S&P 500 index down 1.69% and the tech-heavy NASDAQ down 2.18% on the day, while safe haven assets like gold and the broad US dollar strengthened. No major data are scheduled for release today, but the Bank of Canada is widely expected to raise its policy interest rate by 50bps to 1% on Wednesday, which in this environment, may help the loonie buffer recent USD pressure.



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