News & Analysis

GBP

Sterling price action was fairly muted yesterday morning, even after March’s inflation data substantially exceeded expectations to post a multi-decade high of 7%. More concerning for the Bank of England is that inflation is set to rise further in April, likely by another 1.4 percentage points, as the Ofgem energy price cap is raised over 50% due to higher international gas prices. The pressing need for the Bank of England to keep tightening meant that Gilt yields remained fairly stable relative to the moderation in market interest rates across the G10 yesterday. This enabled the pound to rally over the course of the day as US yields continued to plummet. Over the entirety of the day, the pound rallied over 0.89% against the dollar, while its rally against the euro was more contained as the single currency also strengthened due to similar dynamics.

EUR

The euro is edging higher across the board this morning as markets are positioning themselves for further continued hawkishness from the European Central Bank. This is evident in eurozone bond markets, where yields continue to rise despite moderating in other major sovereigns. While April is usually not a meeting for policy changes, today’s ECB meeting will still be of importance to markets after March’s decision included a faster taper of the ECB’s quantitative easing programme. The central bank has now announced that asset purchases will end in Q3 vs Q4 previously. Since the March meeting, however, nationwide inflation prints from eurozone countries overshot expectations substantially, leaving the ECB with a difficult dilemma as the central bank will have to weigh rising inflation against growth uncertainties arising from the war. This will be what EUR traders will focus on today as well: how confident is the ECB that inflation will move back below their 2% target by the end of their forecasting horizon, and how has the growth outlook changed since the March meeting given more sanctions have been imposed and the war has extended, if not worsened. March’s meeting minutes suggested there was a level of discontent between Governing Council members over these topics. Meanwhile, in the French elections, polling for the second-round, which is set to take place on April 24th, showed increased support for President Macron. The Elabe opinion poll, conducted on behalf of BFMTV, l’express and SFR, now has Macron winning the run-off with 53.5% of the vote.

USD

The US dollar had a mixed session yesterday as the fixed income markets priced in expectations of a lower end point for US interest rates. Against currencies where market pricing hasn’t been as aggressive as in the US, such as EUR, GBP and SEK, the dollar withstood losses. However, similar repricing down under after the dovish RBNZ 50bp rate hike resulted in losses for NZD and AUD, while the Japanese yen also remained under some pressure. This morning, however, the dollar’s dynamics are more clear cut as the greenback starts the European session sustaining losses across the entirety of the G10 complex. The cheapening of the dollar is coinciding with a further reduction in US yields. Today, the two-year yield has already fallen a further 2.2 basis points, compounding a 14bp reduction since Tuesday’s US CPI report. Meanwhile, the 10-year has fallen a further 2.9bps this morning, following on from the 8bp reduction in the past two sessions. With only retail sales data pencilled into the data calendar today for 13:30 BST, the dollar is likely to focus on price action in US Treasury markets as fixed income traders water down expectations of the Fed’s hiking cycle in the wake of Tuesday’s CPI report that showed slowing core inflation.

CAD

Yesterday, the Bank of Canada raised interest rates by 50 basis points, its largest hike since 2000, and also announced that it would start to allow Government of Canada bonds to mature without reinvestment starting on April 25th. The whole event had few surprises: market watchers widely expected both a 50bp move and quantitative tightening. The main adjustments came in the Bank’s forecasts. BoC projections now see a higher medium-term inflation profile than previously forecast because of the Russia-Ukraine commodity price shock and a higher neutral interest rate. With concerns that elevated inflation expectations could become “entrenched,” which would require considerably more policy tightening than currently anticipated to bring back to the 2% target, a higher inflation profile and a higher neutral rate estimation suggests the Bank will continue on an aggressive front-loaded tightening path for the time being. This confirmed our view that the BoC will conduct a 50bp hike at both meetings this quarter.  The loonie rallied in a consistent trend throughout the day after the announcement, with further support coming from rising oil prices. Today, wholesale and factory sales data will arrive at 13:30 GMT.

 

 

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