Despite rallying to a one-month high in yesterday’s session, the pound’s strength looks fragile as economic conditions point towards a sharp economic slowdown in the coming months. Sell-side analysts have revised down their GBP forecasts en masse in the past few days, pointing towards slowing growth conditions, a widening current account, Brexit uncertainty and a hamstrung Bank of England to justify their more bearish calls. Today, consumer credit data at 09:30 BST may start to show signs that households are leaning more heavily on short-term lending options to buffer the cost of living crisis that is now well and truely underway in the UK economy.
The single currency rallied nearly half a percent yesterday as stronger than expected inflation readings from Spain and Germany boosted eurozone yields, while a constructive session for European and Asian equities also helped boost risk sentiment. Headline CPI in Spain printed at 8.7%, 0.2 percentage points above expectations, and set the scene for a record print in Germany of 7.9%. The higher inflation readings led Germany 2-year yields to their highest level since 2011, while the 10-year also rose to its highest point during the negative interest rate period in the eurozone. Overnight, the euro’s prospects have reversed somewhat as the dollar broadly goes bid on higher Treasury yields and lower equity futures. Compounding concerns around the euro today is news that EU leaders have agreed on their sixth tranche of sanctions against Russia, this time targeting sea-borne petroleum products. Structuring the sanctions to avoid pipeline oil deliveries, while also providing Hungary guarantees that it would receive replacement oil should pipeline deliveries become shut-off in countermeasures, resulted in Budapest voting for the sanctions after signs yesterday that the EU’s united front against Russia was starting to crack. The measures have boosted international oil benchmarks further, only adding fuel to the inflation fire. Later today, markets will be exposed to the eurozone-wide inflation data at 10:00 BST, where the headline measure is likely to exceed current estimates of 7.8%.
As global equity indices recovered further in yesterday’s session, the dollar traded broadly lower as US markets were closed for memorial day. With cash Treasury markets closed, Fed Governor Waller’s support of 50bp hikes at ‘several’ meetings, even going past neutral if inflation is stubborn, failed to have a notable market impact. However, this morning as Treasury markets opened, the spike in yields across the curve weighed on European and North American equity futures and gave the dollar a boost. Across multiple G10 currency pairs, the dollar has retraced all of its losses and then some this morning as fixed income markets react to the renewed hawkish commentary from Fed officials. Today, month-end flows are likely to continue the dollar’s rally, as suggested by multiple month-end models following USD weakness mid-month and recent US equity underperformance.
The loonie was one of the stronger performers in the G10 yesterday, rising over half a percent against the US dollar as global equities, including Canada’s TSX index (+0.8%), struck a risk-on tone. The main data released was Canada’s current account balance, which shifted from a slight trade deficit in 21Q4 to a C$5bn surplus in 22Q1. While the trade data substantially beat expectations, the increase in net exports was largely driven by a run-up in energy prices, though volumes were down. Since the increase in oil prices is widely known information that we’ve had for several months, the reaction in USDCAD to the report was limited. Canadian bond yields rose 4-5bps while US yields were flat, and crude oil prices rose almost 2% on the day, two fundamental moves supporting yesterday’s CAD strength. This morning, the loonie is offsetting the downturn in global risk conditions, largely due to the downturn in equities being partially offset by higher crude benchmarks on the back of the EU’s ban on most Russian oil imports. On today’s calendar, the main event of note is Canada GDP for Q1, which releases at 13:30 GMT/08:30 ET. Canadian growth figures are expected to print at 5.2% QoQ annualised.