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GBP
The big news from yesterday came, of course, from the Bank of England. Surprising absolutely no one, the MPC hiked once again by 25bp, taking Bank Rate to 4.5%. More interesting, and the thing that markets had really been waiting for, were the details contained in the Bank’s communications and the Monetary Policy Report that accompanied this latest meeting. Whilst the policy announcement and minutes largely ran back the message from the March meeting, that the Bank would remain data dependent and take decisions meeting by meeting, the MPR showed a substantial upgrade to the Bank’s projections pretty much across the board. Most notable were the upwards revision of expectations for GDP, which now not only showed the UK economy is set to dodge a recession this year, but according to BoE Governor Andrew Bailey “may be the biggest upgrade we’ve ever done”. For markets however the focus was not just on economic growth, but also the Bank’s view on the outlook for inflation and interest rates. Whilst the outlook for the next couple of months showed inflation slowing slightly faster than previously expected in light of lower energy prices, the remainder of the forecast period saw an upwards revision for the path of price growth. The implications for monetary policy from these upwards revisions have split opinion in the analyst community. On the one hand, these increases move the goalposts further away, reducing the likelihood of hawkish beats in upcoming data releases, and perhaps making it easier for a data dependent BoE to pause their hiking cycle at an upcoming meeting. On the other hand, an expectation for more and sticker inflation suggests that the BoE still needs to hike rates further in order to bring price growth back down to their 2% target. In our view, the former interpretation is probably more likely, and as such we maintain our call for the BoE to pause hiking at the June meeting, but with risks to this outlook for Bank Rate skewed to the upside. Markets too appear to be split on how to judge this latest policy meeting. OIS implied expectations for Bank Rate barely shifted on yesterday’s news after initially spiking higher, with almost two more hikes anticipated this year. FX markets, however, saw sterling fall almost a percent against the dollar and a third of a percent against the euro over the course of the day, retracing some of the gains of last week. Data over coming weeks is likely to be crucial in confirming which view is correct, beginning with Q1 GDP released this morning. The release came in slightly above BoE expectations with 0.1% growth over the quarter, showing that upside risks to these latest projections do still remain, even despite yesterday’s upgrades.
EUR
The single currency felt the squeeze in risk sentiment yesterday as it broke its recent range to the downside. This was largely a product of US developments, and with markets paying little attention to hawkish ECB rhetoric without the validation of stronger inflation and growth data, this is likely to persist today despite Bundesbank President Nagel speaking today. It is worth noting that yesterday’s moves in favour of the dollar were quite aggressive given the limited news flow, leading to a retracement this morning. With EURUSD trading at fresh one-month lows overnight, the retracement in the dollar move has seen it drift back into its previous range.
USD
It was another day of dollar strength yesterday as shares in US regional bank PacWest fell 23% after it reported that deposits had fallen 9.5% last week alone, leading it to post more collateral with the Federal Reserve in order to boost its liquidity. Combining with lingering concerns over the debt ceiling ahead of what was meant to be the second round of talks between Congressional leaders today and an uptick in US initial jobless claims, cross-asset price action was firmly in risk-off mode. This all coincided with another weaker-than-expected PPI reading, with producer price growth rising just 0.2% MoM in April. While the softer inflation data underscores the idea that the Fed has likely concluded its hiking cycle, a signal that was already drawn from Wednesday’s CPI report, this was once again insufficient in supporting risk assets given the ongoing stability concerns. Today, the main overnight development has been the delay in the resumption of debt ceiling discussions between President Biden and Congressional leaders. With market concerns elevated and some even looking for continued fallout in order for the impasse to be broken, the delay in discussions until early next week will once again limit how much the dollar can decline. Today, the data calendar is fairly sparse with just the import price index and the University of Michigan inflation and sentiment indices scheduled. Meanwhile, the Fed’s Mary Daly is set to speak after the European close.
CAD
FX markets got jerked around by US regional banks again, with PacWest shares dropping by 23%. With bad news putting the bears back in the driver’s seat, safe haven currencies like USD, JPY, and CHF outperformed, but CAD was not so lucky. The loonie slipped by 0.9% against the greenback, a middling performance within the G10 arena. Equities and crude oil fell sharply alongside the Canadian currency, but while they partially recovered their losses, CAD merely consolidated at a weaker level. With those cross-asset drivers on the mend, there is scope for the loonie to catch back up. The economic calendar remains empty for Canada today.