News & analysis


Sterling price action yesterday was indecisive. After trading 0.6% lower in the morning as tensions with the EU ramped up on the Northern Ireland trade issue, the pound gradually floated back up towards its opening price throughout the day as the US dollar exhibited mild and broad selling. While the pressure on the UK government over the Northern Ireland trade issue has intensified again today as President Biden weighed in on the matter, urging PM Johnson to adhere to the 1998 Good Friday peace agreement, the pound is floating higher. Sterling’s price action also goes against the broad USD move against the G10 today, with the pound the only currency within the space to trade higher. With little idiosyncratic drivers, the pound’s rally can be boiled down to mean reversion. After slipping against the dollar over the past few weeks, we have since argued that without a major shift in the economic outlook, the pound will likely reverse losses to trade back to the middle of its recent range.


Yesterday’s trading session saw the euro climb tumbling lower against safe haven currencies USD, CHF and JPY while it traded indecisively vs other G10 currencies. The setbacks in the EU’s vaccine programme on the back of the AstraZeneca halt in several European countries is adding to the narratives that are currently weighing on the euro, including severe lockdowns and a slow vaccine roll-out. Some selling pressure on the euro may be eased tomorrow however as Italy and France stated they may resume the use of the AstraZeneca shot if the European Medicines Agency advises the shot is safe. The EMA so far repeatedly stated the benefits of the vaccine outweigh the risk but will issue a formal assessment tomorrow. Downside risks remain as the setbacks may have compromised public trust in the vaccinations. Meanwhile, ECB policymaker Peter Kazimir stated the ECB wants to shield the eurozone economy from higher bond yields partly because the EU is rolling out its fiscal stimulus too slowly, and the ECB does not want the region to suffer from higher borrowing costs sparked by the enormous fiscal stimulus package in the US, which falls in line with the ECB’s actions from last week where they pledged to ramp up bond-buying to drive down yields in the eurozone. The ECB’s Frank Elderson speaks at 15:00 GMT today while Dutch citizens go to the voting polls today where PM Mark Rutte is looking to clinch a fourth term.


It’s Fed day! The US dollar struggled to take a clear direction this week and traded in narrow range bounds with G10 peers given the decisive role of today’s FOMC meeting. The upcoming Federal Reserve decision is big for FX markets as a whole as it should give a clearer message as to what the FOMC’s stance is on rising US yields and the improving economic outlook. Since December’s projections and the last meeting in January, the $1.9trn fiscal stimulus package has been passed while a more rapid vaccine roll-out is expected. While this improving outlook has been reflected in the US treasury curve and money market metrics, markets as a whole are trading in the blind as the parameters around the Fed’s new Average Inflation Target framework are unclear. The latest summary of economic projections will be key in this sense, especially as the new rate projections (dot plot) could show a median forecast of a 25bps rate hike in 2023. Coupled with the inflation projections, markets are likely to get a clear message as to what constitutes the inflation overshoot and is deemed enough to warrant rate lift-off by the Fed. The way in which this message, along with a decision over technical leverage ratio exemptions, is delivered will be key in determining the new broad dollar trend. With little data prior to the FOMC decision at 18:00 GMT beyond housing starts data at 12:30 GMT, FX markets are likely to continue trading in a tight range as the event risk from tonight’s meeting remains sizable.


The Canadian dollar continued to log advances against a broadly softening US dollar yesterday after a slip in retail sales sent the greenback lower. However, the broad dollar trend remains tentative with the Federal Reserve pencilled in for this evening. The US dollar has bounced back against the G10 space and the loonie is feeling the pinch this morning as it trades 0.1% lower. With speculation about the Bank of Canada’s QE programme being wound down in April rife, tonight’s Federal Reserve decision is likely to provide the benchmark to what the BoC is measured against. A hawkish signal by the Federal Reserve is likely to take a dent out of the loonie, which has benefitted from rising front-end yield differentials recently. Prior to the Federal Reserve’s decision, however, February’s CPI report is due out at 13:30 GMT. The inflation report in itself is unlikely to be the main driver of the loonie or expectations of BoC policy, but any positive print will only embolden hawkish calls for policy normalisation to occur in April’s meeting.



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