News & analysis

GBP

GBPUSD continued to reach fresh highs yesterday, but this was driven by broad USD dynamics while Boris Johnson’s announcement of the lockdown exit strategy appeared to have no effect. The lack of reaction in the pound is telling. The pound is already trading at multi-year highs against USD and EUR following the rapid rollout of vaccines and doused expectations of negative interest rates for the coming half year, and most of the short-term boost to the economy had therefore been priced in ahead of time. While Johnson’s statement did offer some clarity to the lockdown exit, subsequent stages of reopening are subject to the virus data progression, leaving the outlook subject to uncertainty. Focus now turns back to the March budget. With the hospitality sector closed until at least mid-Q2, an extension to the furlough scheme which currently runs through March 31st is a given, especially given unemployment increased further in December according to figures that came in this morning. The headline 3-month average unemployment rate rose from 5.0% to 5.1% in Q4, although the rise in payroll employee numbers in January shows the labour market has stopped deteriorating since. Jobless claims fell by 20,000 in January.  Risks to the labour market outlook remain as further job losses may materialise when the Coronavirus Job Retention Scheme (CJRS) is wound up and pushes up unemployment in the summer. As the remainder of the data calendar is blank today and no central bank speakers are scheduled, the pound is at the mercy of USD dynamics today and domestic vaccine headlines.

EUR

The euro is trading around 1-month highs against the dollar this morning as the pair received a boost from European Central Bank President Christine Lagarde’s comments that the ECB is closely watching longer-term yields. This was also voiced by the ECB’s François Villeroy de Galhau who told BFM Business TV the central bank will ensure financing conditions remain favourable and that there is no risk of excessive inflation in the euro area. German Bunds remain better offered since open, following the initial corrective bounce yesterday. Today’s data calendar includes January final inflation figures at 10:00 GMT which are set to remain unchanged at 0.2% on a month-on-month basis whereas the year-on-year figure is expected to print at 0.9%. Beyond that, focus will be on Fed Chair Jerome Powell who testifies at the Senate today and could echo the ECB on longer-term yields.

USD

The greenback has started today’s session softer with the dollar spot index weakening overnight to mark an extension of the previous two-day decline as markets await Fed Chair Jerome Powell’s comments on the recent move in Treasuries in his semi-annual testimony to the Senate. The 10-year Treasury yields pushed close to yearly highs as expectations for further economic recovery and a related pickup in inflation strengthened. The Bank of America stated on Monday US yields have already reached its-year-ahead target, including the 10-year surpassing 1.30% and the 30-year floating above 2.16%. Jerome Powell may follow in the footsteps of the ECB in his testimony today and address the rising bond yields and increased inflation expectations. The size and scope of the fiscal stimulus package ties in with these inflation expectations as the odds of more fiscal stimulus rising meant the outlook for economic recovery brightened, pushing up US Treasury yields since the beginning of the year. A House panel advanced the legislation of President Joe Biden’s $1.9tn stimulus package, setting the plan up to pass the full chamber by the end of this week.

CAD

The loonie was slightly weaker against its US counterpart in yesterday’s later trading session after rising to its highest level since 2018. The currency caught a modest bid overnight on the back of firmer crude oil prices as WTI briefly touched $63/b this morning while Brent oil is floating above $66/b, its highest since November 2018. On the monetary front, the Bank of Canada is reducing the frequency of provincial bond purchases, saying credit markets need less support than when the programme began last May. There will be one reverse auction per week for provincial bonds instead of two, according to a representative for the Ottawa-based institution. The decision comes at a time when most provinces have completed their funding plans for the current fiscal year which ends on March 31st, and right after Bank of Canada Governor Tiff Macklem said the nation’s economy has enough stimulus to survive the current downturn and does not need additional help from monetary policy. Oil price dynamics are likely to continue to impact CAD price action today as investors’ appetite remains supported by global vaccination rollouts and hopes for a strong global economic recovery. With the economic calendar being virtually blank for Canada today, all eyes turn to BoC Governor Tiff Macklem who speaks twice tonight at 17:30 and 18:50 GMT.

 

 

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