News & Analysis


The pound was whipsawed by the release of US CPI data yesterday as it traded in a 0.89% range against the dollar. Sterling predominantly followed the G10 move against the greenback, initially slumping post-CPI to then join the dislocated rally in FX against the dollar soon after. However, like other G10 currencies, GBPUSD has quickly given away the questionable post-CPI gains. In comparison to most of the G10, however, the pound is trading higher than the lows seen initially after the CPI release as the hawkish Bank of England pricing helps to shelter the currency from more aggressive pricing of the Federal Reserve. Additionally, data this morning is likely aiding the pound too as it highlighted a more muted impact from Omicron on UK growth conditions. December’s GDP data saw the UK economy contract just 0.2% MoM despite the spike in Omicron cases leading to a capitulation in consumer-facing services spending. This meant overall activity levels remained above February 2020 (pre-pandemic) levels towards the end of last year.


EURUSD was no exception to yesterday’s US CPI rollercoaster, but an interview by European Central Bank President Christine Lagarde led to further volatility in the currency pair as she warned against the ECB acting too quickly on interest rates, as this would dampen growth and risk hitting the labour market. After multiple rounds of dovish commentary by several ECB members, yesterday’s interview by Lagarde seems to be the first one that convinced markets a firmly hawkish pivot at the March meeting is far from a done deal. Her comments saw a complete reversal in sentiment around the euro, with EURCHF ripping over half a percentage point higher on the day yesterday before reversing all gains again overnight. Looking ahead, the focus will be on ECB commentary in order for markets to gauge what direction the ECB’s March meeting will take.


The release of January’s CPI data yesterday didn’t disappoint. After waiting all week for the main event, market volatility picked up after the data showed inflation rising above expectations to post the highest headline inflation rate since February 1982 and the highest core rate since August 1982. Headline inflation came in at 7.5% YoY (0.6% MoM) with the core measure rising to 6% YoY (0.6% MoM). After the Bureau of Labour Statistics updated its CPI weightings earlier in the week to reflect pandemic related spending patterns, the risks were positioned for yesterday’s headline inflation print to overshoot expectations. In the aftermath of the release, US Treasury yields picked up, dragging other core G10 yields higher with them, as the 10-year threatened to break the 2% level for the first time since August 2019. The resulting impact was a stronger dollar in the FX space and a lower cash open in US equities, however, the impact soon reversed. A retracement in equities and a stabilisation in the Treasury market emboldened risk-taking within the FX space. This led to a broad retracement in the greenback, with the DXY index falling to the low 95.00 levels as EURUSD cracked highs not seen since November 10th. Since the immediate swings in markets, Fed President James Bullard came out to express his views that he would raise interest rates by a full percentage point by midyear. By suggesting rates should hit a full per cent by July 1st, Bullard, a voter in the FOMC this year, suggested that the Fed should embark on one 50bps hike within the next three meetings to enable this. Although, he is undecided on whether this should come in March. The CPI data led to sell-side analysts to revise up their estimates of the Fed’s hiking cycle as the report showed inflation pressures beginning to broaden. Goldman Sachs now sees seven 25bps rate hikes from the Fed this year, while money markets are currently pricing in over six consecutive hikes over the course of the year. The headlines that rolled in from Bullard and sell-side analysts soon placed pressure back on US equities and resulted in the dollar reconnecting with the move higher in Treasury yields. The DXY index is now trading close to its highs seen in yesterday’s session as G10 currencies trade back towards their post-CPI lows. Today, with the data calendar light, defensive price action is likely to dominate, especially with US equity futures pointing lower at present.


The Canadian dollar traded in the tightest morning range of the week against the greenback yesterday ahead of US consumer price data, but this wasn’t to last as the currency was flung around by a shift in the broad US dollar upon the release. The currency traded in a 0.73% range on the day, before the broad dollar recovered overnight to leave USDCAD at a fresh 1-week high this morning. The lower crude prices of this morning are of no help to the petro-linked Canadian dollar, especially as 2-year yield spreads turn positive in favour of the US 2-year for the first time since March 2020 this morning. With no protection from crude or fixed income markets, and the data calendar being virtually empty for Canada, the pair looks vulnerable to broader USD moves on the last trading day of the week. US equity performance may be the deciding factor for the loonie today as it is likely to determine broader risk sentiment.


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