News & Analysis


The pound continued to trade unfazed by developments in the Conservative party’s leadership race as the currency continued to trade in line with broader G10 moves against the dollar while showing little volatility around the time when political headlines landed. In addition, data out of the UK has failed to have much of an impact too as both labour market and inflation metrics have failed to put an end to the ongoing debate over the Bank of England’s next move. Price action in GBPEUR will likely determine sterling’s performance today as the UK economic calendar remains light, especially in contrast with the scheduled events in Europe. Of note, however, is a speech by BoE Chief Economist Huw Pill at 09:00 BST. Although, the topic of the event– advanced analytics new methods and applications for Monetary Policy 2022– doesn’t strike confidence that further guidance on policy will be incoming.


After 11 years, the European Central Bank is set to hike rates today, with the decision very much live after ECB sources reopened the debate for a 50bp hike on Tuesday. The macroeconomic backdrop hasn’t been kind for the central bank as President Lagarde takes to the lectern today amid heightened Italian political risk and remaining concerns over Russia’s delivery of gas despite initial signs of flows coming back online. While we have seen a few more sell-side analysts move towards our base case for a 50bp hike this week, both options remain firmly on the table and arguably depend on the ECB’s readiness with the anti-fragmentation backstop. This is because BTP-Bund spreads (Italy – Germany yields) have already widened today due to the increased Italian risk premia brought about by the likely scenario of Italian Prime Minister Mario Draghi handing in his resignation again, and it is likely to be accepted this time after another failed confidence vote in the Senate. While the ECB won’t intervene in bond markets for this reason, they may be forced to act should their decision on interest rates put further pressure on peripheral spreads such that their policy transmission is impacted. The euro’s outlook, therefore, depends a lot on what the ECB does today, and although we have become marginally more bullish on the single currency’s prospects given the news overnight about Russian gas flows, the parity party may very well resume today. Owing to the new times, the ECB will release its policy decision today at 13:15 BST, before the press conference commences at 13:45 BST. With an update on European inflation conditions due from Lagarde, the prospect of further fragmentation in European bond markets, and increased Italian political risk on the cards today, we will also be paying close attention to developments in CHF.


The dollar stemmed its recent decline yesterday as developments in Italy weighed on the euro and sparked renewed buying in the greenback. The DXY index, a broad measure of the dollar’s performance, rose back above 107 in yesterday’s session, while US bond yields rallied and equities came under renewed pressure. This morning, risk conditions remain tentative as equity futures oscillate around yesterday’s closing prices, while European equities trade firmly in the red upon cash open. Again, with very little in the US economic calendar today, events in Europe are likely to dictate the overall risk appetite in markets while price action in EURUSD will likely set the tone for the broad dollar given the large share the pair has in the composite dollar index.


The loonie weakened marginally on Wednesday, in a rare session where global risk did not appear to play a key role in G10 FX. Equity futures struggled to strike a decisive tone, with TSX futures flipping between green and red before notching a meagre 0.29% gain by the end of the North American session. The main move in USDCAD came at 06:30 ET, when the dollar broadly surged ahead of the US cash open. Traders shrugged off the key economic data of the day, Canada’s June CPI report, after Statistics Canada said that inflation had risen from 7.7% to 8.1% YoY across a broad range of components, because the print came in below expectations for an 8.4% gain. Nevertheless, the downside surprise was insufficient to spur much of a rally in USDCAD because it did not yet signal a peak in inflationary pressures and the core measures remained robust, making it unlikely to dramatically alter the Bank of Canada’s risk calculus as it looks to its September meeting. Today’s Canadian economic calendar is dry once again, although retail sales are due tomorrow at 13:30 BST / 08:30 ET.

FX Elsewhere

The Bank of Japan voted 8-1 in favour of keeping all aspects of its policy framework on hold this morning, citing no signs of a vicious wage-price spiral. Doubling down on the policy statement, Governor Kuroda stressed in the press conference that he has no intention to raise rates nor change the target on its 10-year yield curve control policy. Both of which have heavily contributed to the neat 17% decline in the Japanese yen year-to-date. Despite the dollar tailing off again this morning, the Japanese yen is bucking the trend as it current trades 0.15% lower on the day.



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