The pound was little changed against the dollar yesterday as it continues to trade in a relatively tight range of 1% this week. Despite losses of 0.3% this morning exacerbating the range and the pound’s losses on the day, sterling’s price action has been notable in the face of a dovish repricing of Bank of England expectations and pricing of a more hawkish Federal Reserve. Meanwhile, as things stand, GBPEUR sits over a percentage point higher relative to Monday’s open as the euro was hit early on by growth concerns stemming from energy markets. There is nothing scheduled out of the UK today.
The euro has so far been the worst G10 performer of this week as prospects of sanctions on Russia weighed on the single currency, along with rising US yields following signals of faster quantitative tightening by the Federal Reserve. This morning, EURUSD dropped to a one-month low on news that the EU banned Russian coal imports in its first move targeting Moscow’s energy revenue. The package also includes a bar on most Russian trucks and ships. In the next days, EU members will continue to spar about the next moves, which could keep sentiment around the euro shaky. At the same time, concerns about the French elections are weighing on the euro as the prospects of a Le Pen win seemingly increase with each opinion poll. The results of the first round of the elections over the weekend will be closely watched Monday morning.
Headlines from the last 24 hours have added little to the USD narrative, as broader dollar strength continued amid higher US Treasury yields, driven by a sell-off in shorter-term bonds. This followed after comments from Federal Reserve’s Lael Brainard earlier in the week and FOMC meeting minutes from March on Wednesday, both of which confirmed a quicker reduction of the Fed’s balance sheet than in the 2017-19 quantitative tightening cycle. Since then, markets have naturally been pushing yields higher as the prospect of bond sales from the Fed pushed bond prices down and yields up. The DXY index – a gauge of USD strength – is trading at May 2020 highs this morning primarily because of this dynamic, while the slight deterioration in risk conditions is also helping the greenback due to haven demand. Today’s action in FX markets is likely to be milder with the US calendar being quite light, allowing markets a breather before turning to next week’s US CPI print for March.
The Canadian dollar fell nearly half a percent on Thursday amid a broad-based US dollar rally. The rally showed continued momentum off the back of yesterday’s release of the Federal Reserve’s meeting minutes, which signalled an aggressive inflation-fighting stance from the Fed. Partially capping the loonie’s losses was a 1% rise in the price of crude oil that comes as the US ban of Russian oil imports comes into law. Canadian bond yields stretched a few basis points higher amid the US dollar rally. Late in the day, we received Canada’s latest federal budget. The budget showed surprising restraint, as speculation had grown that the Liberal government would continue to spend big. Nevertheless, major new spending promises related to the government’s new agreement with the NDP were not included in the budget. A reduction in fiscal stimulus brings fiscal policy back into alignment with monetary policy, working against inflation, making the central bank’s job a bit easier. Today’s jobs data will be the last crucial data release ahead of the Bank of Canada’s April 13 decision. Barring a major downside miss in job growth relative to expectations, the Bank is most likely going to deliver a 50bp hike.