News & Analysis


Having underperformed the broad G10 market for the past few weeks, the pound snapped back into life yesterday as traders bought the undervalued currency against a broadly weakening dollar. Although GBPUSD traded 1.4% higher at points throughout the day, sterling struggled to compound this rally as it closed the day out just 0.7% higher. While the pound largely fixated on broader market developments yesterday, domestic headlines were still plentiful. Likely speaking at his last conference before leaving the Bank of England’s monetary policy committee, Michael Saunders stated that a Bank Rate north of 2% this year isn’t implausible. His comments added fuel to the 25 vs 50bp debate that is currently ongoing among BoE officials. Although markets remain firm in expecting a 50bp hike from the Old Lady in August, this week’s data will prove influential on that decision. If this morning’s labour market data is anything to go by, the debate will still be live among policymakers. In our view, there remain signs that workers still don’t have the bargaining power to force wage increases that would frighten the BoE, with real wage growth falling at its fastest level on record back in May. However, the debate on the magnitude of August’s rate hike won’t be settled until this week’s deluge of data is released to complete the BoE’s information set. Tomorrow’s CPI data will likely be the most influential in this regard. Meanwhile, in Westminster, Tom Tugendhat was knocked out in the latest round of the Conservative party elections, while former Chancellor Rishi Sunak sits just 5 votes short of reaching the final ballot The ballot will be whittled down further to just three remaining candidates today as a rival campaigns try to win over Tugendhat’s 31 supporters ahead of the ballot at lunchtime. With the race for the PM’s office heating up, markets will likely pay closer attention to the pledged policies.


The ECB Governing Council likely took a sigh of relief when looking at FX markets yesterday. After multiple sessions trading around parity, the single currency compounded Friday’s rally to close 1.4% above the psychological level yesterday. However, with plenty of risk factors still on the horizon for EURUSD, one of which being the ECB decision on Thursday, it is too early to chalk off a structural break below parity for the pair. Today, events in the eurozone are minimal before they pick up in the next two days. Just the final eurozone composite CPI reading for June at 10:00 BST and economic commentary from ECB’s Makhlouf at 15:00 BST populate the calendar today.


The greenback continued to retrace from a 20-year high for the second consecutive session yesterday as traders started to judge that bearish risk sentiment is overstretched. After trading expectations of tighter US monetary policy this year at the expense of lower growth conditions, and thus looser policy, next year following the latest CPI report last week, money market traders continued to fade the pricing of US recession risk yesterday. Rates for December 2023 eurodollar futures rose to 3.225%, with the basis point change in yields outpacing that of the December 2022 rate, which has risen to 3.865%. Given the inversion in the term structure, it’s evident that money markets still expect the Fed to cut its policy rate in 2023, but since the spread has fallen, eurodollar futures imply a shallower easing cycle is on the horizon. The reversal in risk was strong across global equity markets for most of the day, although North American equities returned to red near the end of the US trading day. Nevertheless, G10 currencies remained supported, with all of G10 FX rallying against USD on Monday. An interesting piece of data released yesterday was the July National Homebuilders’ survey, which dramatically missed expectations for a mild decline from 67 to 65 by printing at 55. The data release induced a mildly bearish reaction in risk assets but was insignificant in the broader market context. Nevertheless, it’s something to keep an eye out for as a downturn in the housing market becomes a growing risk narrative in the US and other advanced economies like Canada and New Zealand. Today, the dollar remains on the back foot amid a light data calendar and easing expectations of the Fed’s tightening cycle this year in response to Friday’s inflation expectations data and Governor Waller’s comments. The US data calendar today will have more information on the state of the US housing market, with housing starts and building permits both scheduled for 15:00 BST / 10:00 ET.


The Canadian dollar was tied up in the broad USD price action yesterday as a confluence of better-supported risk appetite and rising oil benchmarks fuelled further CAD gains. A retracement in equity benchmarks, however, saw the loonie give up some gains throughout the back-end of the session to ultimately close 0.37% higher. This morning, with markets continuing to price out the Fed’s 2023 easing cycle due to growth fears and equity futures printing in the green, the loonie is extending yesterday’s gains against the dollar. No economic events are scheduled ahead of tomorrow’s CPI data.



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