News & Analysis


Price action in the pound was fairly muted yesterday in the absence of any domestic economic data. Today could be more of the same as economic events remain sparse ahead of tomorrow’s speeches by Bank of England policymaker Catherine Mann and Governor Andrew Bailey. The main GBP specific headlines out of yesterday’s session came from the IMF, which published its latest batch of growth forecasts. For the UK economy, the IMF downgraded its 2022 and 2023 growth projections. This year, the Washington based lender said the UK economy would grow 3.7%, down a percentage point from its previous estimations, to exhibit the joint-fastest growth rate in the G7. However, in 2023, the IMF predicted the UK economic expansion will slow to just 1.2%, a near 50% reduction from its previous estimation. The IMF expects the UK to exhibit the slowest growth and highest inflation rate among the G7 next year, which is likely keeping interest rate expectations for the Bank of England’s May meeting pinned at 30bp.


EURUSD has recovered from yesterday’s lows despite the further increase in both the 2Y and 10Y US Treasury yields this morning, which in this environment have usually been bearish on EUR. The recovery in the pair can’t be attributed to narratives related to the euro, however, as more G10 currencies have been rallying against the greenback overnight while sentiment around the euro remains weak. The Ukrainian army reported Russian forces attacked all along the line of contact in the Donbas region, with President Zelenskiy stating that Moscow has opened a new campaign to conquer the area. Kreminna’s regional governor stated Russian forces took a pocket of territory including the city of Kreminna. Columns of tanks were also seen heading north on the road from the southeastern port of Mariupol. With Russia stepping up its bombardment of transport infrastructure across the country, Ukraine’s ability to quickly deliver Western arms 1350km from the Polish border will be more challenging. A further downside risk for the euro is the French election, which is set to reach a conclusion early next week following Sunday’s second-round voting. Tonight, President Macron will face down his run-off competitor Marine Le Pen in the final TV debate at 21:00 CET. Currently, Macron is enjoying a wider polling margin than earlier on in the month, leading Le Pen by 56% to 44%.


Fed communications have been growing increasingly hawkish. As we noted in yesterday’s morning report,  St. Louis Fed chief James Bullard, a well-known inflation hawk, stated on Monday that a 75bps hike was on the table for May’s meeting, albeit it isn’t his base case. Yesterday, one of the FOMC’s bigger doves, Charles Evans of the Chicago Fed, further bolstered hawkish expectations as he stated he expected the Fed Funds Rate to exceed the neutral rate, the rate in which monetary policy is neither contractionary nor expansionary, by next year. This would see US interest rates above 2.5% under current estimations of the neutral rate. He was also not reassured by signs that underlying inflation pressures might be starting to ease, despite two consecutive months of lower core inflation prints. US Treasury yields continued to rise overnight to reach a fresh high this morning, but are now trading lower, providing currencies like JPY and the euro a bit of a breather.  The focus now turns to comments from Fed’s Daly and Evans at 16:25 and 16:30 BST, ahead of the Federal Reserve Beige Book release at 19:00 BST.


The Canadian dollar weakened slightly against the US dollar on Tuesday, leaving the loonie in the middle of the G10 pack on the day. The weakness was largely driven by bond yields rising faster in the US than Canada, and crude prices falling 5% on the day, both of which reduce the incentive for investors to hold CAD. The movements in the bond market came after renewed hawkish comments from the Fed, which we discuss in the USD section. Meanwhile, oil demand is still being held back by lockdowns in Shanghai and other parts of China. The market-implied demand outlook for crude could have fallen further on downgraded global growth estimates for 2022 by the IMF, which cut its global growth forecast from 4.4% to 3.6% yesterday. On today’s calendar is Canadian CPI at 13:30 BST. Inflation data from March will be viewed in respect to the energy price shock brought about by the onset of war in Ukraine and the Bank’s latest 50bp hike.

FX Elsewhere

In a relatively quiet European session yesterday, much of the focus was on APAC currencies. More specifically, the Japanese yen and Chinese yuan. Both currencies have been put under pressure by rising US yields as growth conditions in Japan and China warrant either ultra-loose monetary conditions in the case of Japan or a degree of monetary easing in the case of China. As the US 10-year rose just shy of 3% yesterday, the Japanese yen hit a 20-year low yesterday while the Chinese yuan weakened to levels last seen in November. In the case of JPY, not only have nominal yield spreads with the US continued to widen, but inflation-adjusted yield spreads have too due to the recent inflation shock hitting Japan. Relative to the beginning of March, the Japanese yen has lost over 11%. Coinciding with the JPY weakness is a 1.05% increase in US-Japanese real yield spreads on 10-year bonds. The sharp rate of JPY depreciation has prompted increased verbal intervention by the Japanese Finance Minister and Bank of Japan Governor Kuroda, but without material FX intervention, markets are yet to head the calls. Meanwhile, in China, Covid lockdowns in major industrial cities such as Shanghai continue to weigh on the domestic growth profile. This has sparked investor caution as PBOC officials are starting to show a degree of sensitivity to the growth hit. Over the weekend, the Chinese central bank cut the required reserve rate on bank deposits by 25bps, while on Monday evening they announced 23 measures to revive China’s economy. The measures echoed those implemented in February 2020 after the initial Covid outbreak. Growth concerns in China specifically are likely prompting capital outflows, which are weighing on the yuan, while in Japan, the yen has become a one-way bet for FX traders of late as widening interest rate differentials continues to put pressure on the yen’s carry.



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