News & Analysis


GBP price action continues to be driven by broader market dynamics as the domestic economic calendar proves light. During yesterday’s session, sterling traded in a relatively tight range against the dollar, despite heightened volatility persisting in the US rates space. This morning, the pound has retraced this week’s losses against the dollar as US yields show signs of moderating, while against the euro it is sustaining minor losses. It seems at present that traders have found a sweet spot in GBPUSD and GBPEUR and are unlikely to be jolted too far from it without a substantial economic event or piece of data. That is unlikely to come today, despite BoE Chief Economist Huw Pill pencilled into the calendar. Speaking at the Bank’s 8th international conference on sovereign bond markets at 13:15, Pill is only scheduled to host a 15 minute introductory speech, meaning commentary around the Bank’s current or future monetary policy stance is unlikely.


The euro took on some water in the latter part of yesterday’s trading session as the FOMC’s meeting minutes compounded Tuesday’s comments from the Fed’s Lael Brainard on quantitative tightening, which in turn strengthened the dollar at the margin. Meanwhile, further sanctions on Russia remain on the table and are weighing on the single currency. Italy’s Prime Minister Mario Draghi stated that Italy would support a ban on Russian gas imports if the EU is united behind it. The comments pushed natural gas futures up to January levels. While a proposal on gas sanctions hasn’t been publicly discussed yet, Russian war crimes on civilians in Ukraine are pushing EU leaders to take an increasingly hard stance. This morning’s data calendar included German industrial output from February which rose by 0.2% MoM, in line with expectations, shifting the focus to the European Central Bank’s meeting accounts from March now as these are released at 12:30 BST.


The broad US dollar chopped and changed in yesterday’s session. From the early Asian trading hours up until mid-afternoon, the dollar was broadly offered across the G10 space. However, news that IEA would supply a further 60m barrels of oil to the international market, on top of the US 180m barrel draw from its Strategic Petroleum Reserve, sent commodity currencies lower and broadly spurred on the dollar. Then came the FOMC March meeting minutes, which outlined that if it wasn’t for the outbreak of war in Ukraine and the economic uncertainty induced by it, Fed officials would have likely raised rates by 50bp in March. Additionally, the committee showed an appetite to “expeditiously” raise rates to neutral territory, while on quantitative tightening – the process of reducing the Fed’s balance sheet after two years of QE post-pandemic – the FOMC had largely formed a consensus around capping the balance sheet reduction to $60bn in US Treasuries and $35bn in Agency MBS per month. The initial reaction in markets saw the US Treasury curve steepen as 10-year yields rose more than their 2-year counterpart, while the dollar went bid on the Fed’s more hawkish preference to quickly remove monetary stimulus. However, markets quickly faded these moves. At the end of the session, the US 10-year rallied only 3.7bp to sit just shy of 2.6%, while the yield on the 2-year fell 6bps to sit below 2.5%. The moderation in US yields meant the dollar’s strength, especially against low-yielding currencies like JPY and EUR, was soon reversed. Today, given the focus on how bond markets in the US are trading the implied path of US monetary policy, commentary from St Louis President James Bullard at 14:00 BST will be closely watched. Given how current pricing of the Federal Reserve’s tightening cycle is quite full at present, we believe the dollar may have topped out close to the 100 mark on the DXY index, with a further deterioration in global risk sentiment or a repricing of the Fed’s terminal rate needed to spur the dollar higher.


The Canadian dollar fell nearly half a percent on Wednesday as the recent rally in commodity currencies began to fizzle out. News that the IEA would be conducting a further 60m oil supply increase following the Biden administration’s decision in March to release 180m barrels from the Strategic Petroleum Reserves weighed on crude prices. The price of crude oil fell 4.95% on the day, sending the North American benchmark back below the $100 per barrel threshold. The USDCAD pair continued on its move higher later in the day after FOMC minutes from March’s meeting were released. The Fed revealed much of its plans to reduce the size of its balance sheet (otherwise known as “quantitative tightening”), which turned out to be largely in line with a call we made in March. The Fed suggested roll-off caps for Treasury securities could peak at US$60bn, whereas we called for US$70bn in March. The quantitative tightening details, alongside news that several Fed officials would have supported a 50bp March hike if not for Russia-Ukraine, helped fuel a broad US dollar rally. Nothing of importance on today’s Canadian economic calendar, but jobs data on Friday will give us the final major piece of the data puzzle ahead of the BoC’s April 13th decision.



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