The pound followed the broader market move against the dollar yesterday, with GBPUSD falling overnight due to geopolitical concerns and extending its move to the downside following the rally in US yields. With the data calendar incredibly light in the run-up to Thursday’s Bank of England meeting, the pound is trading in line with wider market moves, although continued upside against the euro on a technical basis seems to be binding thus far. The only market-relevant news this morning comes from the National Institute of Economic and Social Research (Niesr), which claims that the UK economy is already in recession and faces stagflation. While the BoE is unlikely to reference this in their MPR on Thursday until hard growth data confirms it, the subject of a recession or not will likely be extensively deliberated among the MPC.
While price action in EURUSD largely fell in line with the broader market move in the morning of yesterday’s session, the currency pair’s response to the rally in US Treasury yields was telling. Although the move in US Treasuries was partly tracked by European bond markets, the single currency extended its losses to record a near percentage point drop on the day. With the ECB’s hiking cycle likely to be halted by an expected downturn in growth conditions heading into Q4, the single currency remains vulnerable to any hawkish repricing of the Fed’s terminal rate. With an array of Fed speakers scheduled for today, the prospect of another increase in US yields has left the euro trading flat despite the more stable risk backdrop this morning for global assets heading into the European open. On the eurozone economic data calendar, markets have already received positive German trade balance data for June ahead of the first release of July’s services and composite PMIs for Spain and Italy at 08:15 BST and 08:45 BST respectively, with the final readings from France and Germany due shortly after before 09:00 BST.
The market narrative of the past week was turned on its head yesterday as market participants turned their attention away from trading a broadly weaker US dollar and tuned in to watch a plane. Within the plane was House of Representatives Speaker Nancy Pelosi, who touched down in Taiwan’s capital city of Taipei, the first high-ranking US ambassador to do so since 1997. News of Pelosi’s planned arrival had already sent markets seeking a modicum of refuge, propping the dollar up and extending the recent rally in the yen as China flexed its military muscles over the Taiwan strait in response to the US’s recognition of Taiwan. Shortly after Pelosi’s plane wheels touched Taipei’s tarmac, the risk-off rally in the Japanese yen started to fade. This wasn’t a reflection of reduced political risk, but instead, the rally in front-end Treasury yields following comments by San Francisco Fed President Mary Daly. Stating that the Fed is “nowhere near done” on curbing inflation, Daly’s comments pushed Treasury yields back to levels seen prior to last week’s Fed meeting, stripping the recent risk rally of one of its major drivers and further boosting the dollar’s rally on the day. Daly’s comments were compounded by other Fed members shortly after, with Loretta Mester emphasising the need to lower prices and Charles Evans predicting either a 50bp or a 75bp at the September meeting. This morning, with bond yields fading yesterday’s rally, the dollar is back trading on the defensive, with focus very much still on political developments in South East Asia as China has announced live-fire military drills from August 4th to 7th. Additionally, another packed central bank calendar will keep markets guessing about the Fed’s next policy decision. While a lot of speakers have already given their views on policy, such as Daly and Bullard, markets will get a fresh assessment from Barkin at 16:45 BST and Kashkari at 19:30 BST, although the market impact is likely to be more muted given both are non-voting FOMC members this year. Finally, in what is building to be a blockbuster day for markets, the latest decision by OPEC+ on September’s production will be announced. Any increase in supply, as per President Biden’s request to Saudi Arabia, will be a surprise for the market consensus and will likely lead oil prices lower. This is likely to boost risk assets further as a moderation in oil benchmarks leads the disinflationary path for headline inflation over the coming months.
The downturn in risk conditions, which saw US equities close in the red and oil finish the day relatively flat, resulted in the Canadian dollar extending this week’s losses with another 0.3% slip against the greenback. The loonie’s losses were limited compared with other G10 currencies, however, yet again highlighting the Canadian dollar’s strong correlation with broader USD developments. Price action in front-end Canadian bond yields likely helped as they tracked USTs higher with a 14.2bp move on the day. This morning, the loonie is retracing yesterday’s declines, in line with the broader risk rally in higher-beta G10 currencies, while the decision from OPEC+ will sit front and centre for petro-currency traders.