The pound spent most of yesterday’s session under pressure from falling Gilt yields as Chancellor Rishi Sunak delivered the Autumn budget in line with expectations. That is, all of the fiscal headroom afforded to him by the OBR’s improved economic outlook wasn’t spent, thus shrinking the expected Gilt issuance over the 5-year horizon relative to March’s projections. Today, the pound looks better supported against both the dollar and the euro, despite ongoing tensions with the EU in the background. France is expected to announce the details of its retaliatory measures either today or tomorrow if its fishermen don’t get access to UK waters. Broadly the measures include customs and health checks applied to goods unloaded in French ports, with a ban on fish and checks on Trucks, while the second will restrict energy supply to the Channel Islands. The ongoing spat between the UK and France has yet to dent FX price action thus far, but a substantial increase in trade restrictions could reverberate into a bigger dispute with the EU as a whole, especially as negotiations over the Northern Ireland protocol continue.
Ahead of today’s European Central Bank meeting, EURUSD traders have been positioning themselves within tight ranges despite our expectation that the monetary policy meeting is unlikely to be too instrumental for the pair. Last month’s meeting already saw the first hawkish twist to the ECB’s policy as they announced to moderately slow down asset purchases through the pandemic emergency purchase programme (PEPP) in Q4, and with economic fundamentals indicating a slowdown in growth going into the final quarter, it is unlikely the meeting will be accompanied by any hawkish surprises today. Besides this, the ECB won’t update their economic projections until the December meeting, where the central bank is expected to announce when PEPP is going to end exactly and what policy will look like in the post-PEPP era. However, that won’t stop potential headlines from being generated as President Lagarde speaks to the media on the latest economic backdrop, which is seen to be one of slower growth and more persistent inflation with higher expectations of tighter policy next year. Heading into the meeting, money markets are pricing in a full 20bps hike by December 2022, meaning any push back on this from Lagarde could be where the FX impact comes from. Beyond this, on the calendar will be German employment figures at 08:55 BST and several confidence indicators from Italy and the eurozone at 09:00 and 10:00 BST respectively.
Yesterday’s dollar moves were nothing to write home about as the DXY index remained within Tuesday’s ranges, and with little on the calendar today for the US, it will take a lot to meaningfully change the dollar’s course until the preliminary Q3 GDP release at 13:30 BST. Democrats are still at odds over President Joe Biden’s spending plan, with Representative Richard Neal rejecting the billionaire tax while Senator Ron Wyden insisted on it. The House is currently discussing a 3% surtax, on top of the top income rate for anyone earning over $10 million. Biden will leave for summits in Europe today and wanted to finalise a framework before his departure. Beyond today’s GDP release, which may be instrumental for the dollar, focus will be on US initial jobless claims also at 13:30 BST.
Yesterday, all eyes switched firmly to the Bank of Canada as the central bank not only finalised its QE programme by entering the reinvestment stage but also brought forward its expectation of when the output gap would close from H2 2022 to “the middle quarters of next year”. The rate statement led to front-end yields climbing, with the 2-year sitting some 18bps higher at one point, and the loonie gaining nearly three quarters of a percentage point against the dollar. However, as the session wore on and Governor Macklem failed to double down on the hawkish messaging in the press conference, CAD gains were reduced with the loonie closing the session out just 0.25% higher. Adjustments in bond markets are likely to continue today ahead of tomorrow’s August GDP data, especially with US GDP set to be released later today. Spreads between US and Canadian debt are likely to determine USDCAD in today’s session.