News & Analysis


The pound started yesterday’s session on the front foot as UK markets opened after a long weekend. UK government bond yields rallied, catching up with Monday’s move higher in global bond yields, despite eurozone and US yields moderating on Tuesday. Meanwhile, the FTSE 100 notched gains of 0.22%. The performance in UK assets boded well for the pound for much of the day, until the US dollar bounced back in the afternoon session. The wave of dollar strength resulted in the pound closing the day out flat against the greenback. There was little in the way of market-moving data yesterday, with most of the focus resting on pricing for the Bank of England. In money markets, traders toyed with the idea of pricing 125bps of hiking from the BoE by its September meeting. This timeline implies three 25bp hikes and one 50bp hike in that time frame, with the latter move set to be the first time rates have risen by 50bp in the UK since 1995. However, sell-side analysts continue to push back against market pricing, suggesting that the Bank of England’s Bank Rate will end the year in the range of 1.25-1.5%, implying a maximum of 75bp worth of hikes over the remainder of the year. With the Bank of England set to announce policy on Thursday, and a 25bp hike to 1% largely expected, focus will be on the Bank’s forward guidance and assessment of economic growth conditions. Today, however, the BoE’s implied hiking path will be compared directly with the Fed’s as the US central bank concludes its two-day meeting and announces its latest decision this evening.


Price action in the single currency was fairly muted yesterday. A reduction in US yields did prompt a brief spike higher in EURUSD, but the move wasn’t set to last as the pair closed the day out just 0.14% higher on the day. The limited reaction in the single currency came amid claims by European Central Bank Executive Board Member Isabel Schnabel that it’s time to take action to tame inflation and that an interest rate hike as early as July is possible. With money markets already predicting rate lift-off from the ECB as early as July, EUR traders are waiting to see if the ECB can actually walk the walk before turning around bearish bets on the currency. This morning, with global markets trading in a relatively subdued manner, the euro is trading flat against both the dollar and the pound. This comes amid comments from European Commission President Ursula von der Leyen that the EU will meet today to discuss a ban on Russian oil imports that will be phased-in over the next six months.


The dollar fell throughout yesterday’s session as Treasury yields slipped ahead of tonight’s Federal Reserve announcement. After briefly breaking through 3%, the US 10Y Treasury yield moderated substantially throughout yesterday’s trading session, dipping as low as 2.9% at one point. The drop in back-end Treasury yields released pressure from the chamber for global FX markets, with more yield-sensitive currencies benefitting from the move. The South African rand notched gains of 2.1% in yesterday’s session after hitting lows last seen in December 2021 the day prior, while the Brazilian real also notched impressive gains of 1.55% to chalk off Monday’s losses. However, the moderation in Treasury yields wasn’t set to last as the 10-year bounced back to close pretty much flat on the day at 2.97%. While this had little bearing on the relief rally in EM currencies, it resulted in the dollar trimming its losses against its G10 counterparts. This morning, there is a feeling in markets that this is the calm before the storm as the Federal Reserve is set to announce its first 50bp hike since May 2000 at 19:00 BST. However, the change in rates is unlikely to fuel cross-asset volatility, largely because the Fed signalled that this move was coming via inter-meeting communications. Instead, the market impact is likely to come from how quickly the Fed “phases in” its quantitative tightening regime and indications of forward guidance from Chair Powell at the press conference at 19:30 BST. Currently, markets are pricing the peak in the Fed’s tightening cycle at 3.35% around mid-2023, with overnight index swaps implying a fed funds rate of 3% come year-end.


Tuesday was quiet for the loonie despite far greater volatility in other major currencies. The Canadian dollar gained 0.3% on the day, leaving it in the middle of the G10 pack against the dollar. Canadian bond yields rose 6bps at the 2Y mark, in line with the US, while at the 10Y tenor, Canadian yields rose 2bps opposite a 1bp dip in its US counterpart. Oil was up two thirds of a percent. The limited appreciation in CAD is in line with the slight moves in yield differentials and oil relative to recent volatility. Today, nothing will matter for markets as much as the Federal Reserve’s rate decision at 19:00 BST / 14:00 EST.

FX Elsewhere

After notching gains of 0.65% against the US dollar yesterday, the Aussie dollar continues this morning in earnest after March’s retail sales data exceeded expectations by 1.1 percentage points to print at 1.6% MoM. The strong beat in the consumption data has only had a slight impact on AUDUSD, however, with the pair trading just one-tenth of a percentage point higher this morning as traders are likely unwilling to take more extreme positions ahead of tonight’s Fed meeting.



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