News & Analysis


With markets still adjusting to the latest Fed decision, sterling, along with the rest of the G10, fell against the dollar yesterday. At the time of writing, the pound sits over 1.3% lower against the dollar this week as the repricing in the rate space continues to weigh, however, sterling’s outperformance against the euro within this environment has been notable. Thus far this week, the pound’s gains against the euro sit at 0.6% as GBPEUR returns to recent highs. Expectations for the Bank of England next week may provide some stability for the pound, which trades relatively flat against the dollar and marginally higher against the euro this morning. Money markets are now fully pricing in a 25bps hike from the Old Lady on Thursday, with current rates for December’s meeting sitting much higher at 1.35%. While there is some risk the BoE won’t hike rates next week, given they haven’t conducted successive rate hikes since 2004, we think this risk is negligible in the current inflation environment. Today, no economic data is set for release, meaning the emphasis remains on the rates space and post-Fed adjustments. Meanwhile, in politics, pressure is mounting on Boris Johnson to delay plans for a £12bn national insurance rise in April in order for him to save his job. Meanwhile, police this morning have asked Sue Gray, the senior civil servant in charge of investigating any breaches, to refrain from including details of the parties as they continue to investigate the manner. This is only likely to hold up the timing of the report’s release.


The euro got its teeth kicked in by further rising US Treasury yields and became the worst G10 performer in yesterday’s session as it plummeted to lows against USD last seen in June 2020. While EURUSD was already being weighed down by rising US yields and rising tensions between Russia-Ukraine, the FOMC decision from the night before only weighed further on the pair as market expectations for rate hikes by the Fed have now increased even further and the euro is one of the more sensitive G10 currencies to yield differentials and therefore increased expectations of Fed policy tightening. This morning’s upside surprises to French and Spanish GDP failed to spark some bullish EUR sentiment, ahead of German GDP at 09:00 GMT and before markets turn to the European Central Bank meeting of next week.


The US dollar saw another swathe of strength yesterday, clearly driven by a hawkish Fed and rising front-end yields while the currency also finds support in the lingering Russia-Ukraine tensions. Market bets on rate hikes by the Federal Reserve have increased since Wednesday evening’s meeting, even as market pricing was aggressive ahead of the meeting already and risks were therefore tilted to the Fed underdelivering. Policymakers have shown increased concerns over the inflation outlook, which was notable in Powell’s press conference, which puts increased focus on today’s core PCE price index figure – the Fed’s preferred measure of inflation. The figure is expected to rise further to 4.8% from December’s 4.7%, which would only confirm the current aggressive pricing by markets.


The Canadian dollar remained under pressure in yesterday’s session as it extended Wednesday’s losses by 0.58% over the course of the session. The pressure placed on the loonie wasn’t isolated, however, with the whole of the G10 space slipping against the greenback as front-end US yields rose above 1.2%. Markets correlated with the loonie’s performance, such as US equity markets and North American commodities, also slipped in yesterday’s trading, meaning there was little shelter for the loonie from the US dollar’s rampage. This morning, conditions seem somewhat calmer than in yesterday’s market as US yields continue to trade around recent highs but show no signs of breaking to the upside like in yesterday’s session. Focus for CAD traders will still rest on cross-asset performance, however, in light of an empty event calendar domestically.



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