News & Analysis

GBP

The British pound was largely a spectator to yesterday’s events as the dollar leg predominantly drove price action in the pair. The broad improvement in the global growth backdrop has helped the pound rise from recent 16-month lows, recorded just three days ago. The pound now sits 1.43% above those levels, with the Bank of England the next hurdle for traders to surpass. Expectations are for the BoE to hike for a third successive meeting today, to bring Bank Rate up to 0.75%, however, given the latest inflation shock since the February meeting, focus will rest on the dissent among MPC members who will opt for a 50bp hike. With no Monetary Policy Report set to be published at today’s meeting, the focus will rest heavily on the meeting minutes and concerns among MPC members about runaway inflation expectations. The next meeting isn’t until May, and with strong labour market conditions and rising inflation expectations, some MPC members may be concerned of a wage-price spiral forming between meetings. In such a scenario, a further recovery in GBPUSD is likely.

EUR

The euro benefited from an improvement in risk sentiment yesterday, along with European periphery currencies, as reports suggested Ukraine and Russia made significant progress on a tentative peace plan including a ceasefire and Russian withdrawal. The plan required Kyiv to declare neutrality and accept limits on its armed forces, while it would also have to renounce its ambitions to join Nato and promise not to host foreign military bases or weaponry in exchange for protection from allies like the US, UK or Turkey. Still, Ukrainian officials are sceptical that Russia’s Vladimir Putin is fully committed to ending the war, as there are growing concerns that Moscow may be buying time to regroup its forces and resume aggression. Putin also showed no sign of compromise and vowed Moscow would achieve all of its war aims in Ukraine. Markets remain optimistic, with EURPLN, EURCZK and EURHUF trading around three-week lows this morning. Sovereign yields in the eurozone also moved higher, with the German 2-year yield having risen close to February highs as markets ramp up interest rate expectations for the ECB. This comes after the Russian invasion of Ukraine and sweeping sanctions from the West initially drove yields to December lows due to the uncertain outlook, but the developments in peace talks raise hope that the ECB’s hawkish shift came at the right time and would not substantially weigh on eurozone growth. For today, eurozone data is sparse on the calendar but markets will keep an eye on the CBRT rate decision at 11:00 GMT.

USD

The broad dollar slumped 0.27% over the course of yesterday’s session, despite the Federal Reserve hiking rates by 25bps and signalling to markets that a further 6 rate hikes are likely this year. Although expectations were elevated for the Fed meeting, the dollar sat firmly on the back foot leading into the event yesterday as top economic advisors in China suggested policy should support markets following a tumultuous week for Chinese equities. This sent base metals higher across the board as markets prepared for further stimulus, potentially in the form of lower Chinese policy rates. The rise in the price of metals and the improvement in China’s growth outlook boosted AUD and NZD, which rallied 0.86% and 0.67% respectively. However, it was SEK that posted the largest gain against the dollar at 1.74% following hawkish commentary from Riksbank Governor Stefan Ingves. With the risk backdrop better supported by Russia-Ukraine peace talks, and select G10 currencies already rallying due to idiosyncratic factors, it was time for markets to trade the Fed. Initial communications from the US central bank saw a 25bps hike delivered, a downgrade to their growth forecasts, an upgrade to their inflation projections, and a sharp upwards revision to their dot plot projection. Not only does the Fed’s forward guidance measure indicate six further hikes this year, but it now foresees rates sitting above the estimated neutral rate in both 2023 and 2024. Following the release of the materials, the dollar initially benefited as two-year yields spiked. Currency pairs like EURUSD went back to trading slightly negative on the day before Chair Powell’s press conference. Powell highlighted that there was strong support for sharp policy tightening among FOMC officials, as they are acutely aware of the need to bring inflation and inflation expectations back to target, while he also suggested that quantitative tightening was imminent and set to be both earlier and larger than the previous cycle. Despite the hawkish rhetoric staying in place throughout the press conference, two-year Treasury yields struggled to break the 2% threshold and US equities sat in the green. This led to the dollar bid fading throughout the press conference. The dollar closed the day out lower against most G10 currencies by a magnitude of at least a third of a percentage point. Just safe havens CHF and JPY sustained losses on the day, likely due to their lower yields and the reduction in perceived market risk. Today, markets will continue to chew on yesterday’s Fed meeting, with US rates markets set to dictate the tone for broad FX markets. At present, US equity futures sit in the green, following on from a strong session for APAC indices, while the dollar continues to sustain broad losses, led by AUD this morning.

CAD

USDCAD traded erratically on Wednesday thanks to a packed economic calendar that delivered several surprises to market participants. Canadian inflation rose to a new 30-year high of 5.7% YoY, beating expectations and compounding the case for a follow-up rate hike at the next Bank of Canada decision. CAD immediately rallied against USD on the announcement, before reversing course over the next few hours. The Federal Reserve then shocked markets with an announcement that one analyst called “the most-hawkish the FOMC has been in at least a generation.” While the 25bp hike to the federal funds rate was completely expected, the dot plot surprised just about everyone by fully embracing market pricing and raising the median number of expected hikes for 2022 from 3 to 7. While USDCAD surged on the announcement, a broad-based fall in the US dollar ensued despite Fed Chair Jerome Powell’s subsequent press conference further confirming the hawkish pivot. Also factoring into yesterday’s price action was a broad-based improvement in risk sentiment that saw equities rally on every major global exchange. This risk-on shift coincided with news reports that Kyiv and Moscow drafted a tentative neutrality deal that could end the bloody war plaguing Ukraine. The loonie’s one-day rise of about two thirds of a percent lagged behind its fellow G10 risk currencies, but beat out havens like CHF and JPY. In other markets, WTI crude fell by 1.45%, a much smaller daily move than we’ve seen lately, while bond yields continued their trend higher. Today’s calendar is more relaxed with US jobless claims and industrial production both releasing at 12:30 GMT.

 

 

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