News & Analysis


Price action in GBPUSD was dominated by the dollar leg in yesterday’s session, and with the greenback strengthening across the board, the currency pair shifted 0.45% on the day to wipe out all of Tuesday’s gains. Today, with limited data out, the focus for GBP traders will be on the EURGBP cross and whether it can return to its year-to-date high on the back of today’s ECB meeting. Meanwhile, in politics, Boris Johnson is set to announce his economic plan in a big policy speech today as he attempts to reset his leadership following a failed vote of no confidence vote earlier in the week. The Prime Minister is expected to focus on housing, with the possibility of corporation tax cuts coming down the line.


The final reading of Q1 GDP yesterday, which saw an upward revision from 5.1% to 5.4%, was largely due to volatile components and saw most eurozone economists warn that it wasn’t representative of a stronger economic backdrop. Despite this, markets took the higher growth data as an excuse to price in a much more aggressive ECB hiking path, with money markets pricing in 200bps of hikes by May 2023 and front-end Bund yields spiking. The higher interest rate backdrop in EUR markets supported  the single currency. This morning, EURUSD trades flat ahead of the ECB meeting at 12:45 BST. While most of the focus is on the President Lagarde’s forward guidance due to the fact that the central bank has repeated that rates won’t begin to rise until Q3 due to its sequencing preferences, there remains a risk that the ECB decides to end its QE programme early and hike at today’s meeting. Alternatively, the self-imposed constraint could be loosened, albeit at the cost of losing face, meaning the balance sheet could continue to expand until July while the deposit rate is raised. Although there is an outside probability this scenario could ensue, market positioning for it is extremely light and suggests a substantial market reaction should it take place. Our base case is for the deposit rate to be held at -0.5%, however, with Lagarde’s forward guidance pointing towards a 25bp hike in July and potentially a 50bp hike in September. Hawkish guidance from the ECB towards a larger 50bp hike as early as July will likely stimulate further EURUSD gains this afternoon.


The dollar broadly gained in yesterday’s session as Treasury yields resumed their rally. The 10-year yield traded back up above 3%, and in combination with higher commodity prices, pressured USDJPY to touch fresh 20-year highs. The decline in the yen sparked renewed broad dollar buying, which persisted throughout the course of yesterday’s session. This morning, the greenback remains stronger across most of the G10 space, with only JPY trading higher. This is likely due to valuation effects. Similar to how JPY dictated the broad dollar in yesterday’s session, markets will take cues from EURUSD today as the ECB releases its latest policy decision. This all comes ahead of tomorrow’s US CPI report for May, which is expected to see core inflation pressures moderate.


Following a 2% rally over the course of the past fortnight, the Canadian dollar finally ran out of steam yesterday. The currency shifted 0.2% on the session as the US dollar broadly strengthened. Negative North American equity returns didn’t come to the aid of the loonie either, as renewed concerns over the consumer demand outlook in the US and higher rates pressured major indices. Today, the loonie starts the session lower against the greenback yet again ahead of the Bank of Canada’s annual financial system review at 10:00 ET/ 15:00 BST. Although usually a dull event, the review will likely help traders price a more accurate terminal rate for the Bank of Canada in money markets, given that financial stability considerations, mainly stemming from the highly leveraged housing market, may prevent the BoC from hiking rapidly to the top end of their neutral range.



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