News & Analysis


Sterling looks set for a relatively quiet end to the week, with only the release of GfK Consumer Confidence data and a speech by the Bank of England policymaker Jonathan Haskelof note today. Yesterday’s price action was dominated by developments in the dollar, leading to cable falling six tenths of a percent, but with the pound finishing the session flat against the euro. This was despite testimony by Bank of England Governor Andrew Bailey to the Treasury Select Committee, an event that does on occasion generate headlines. Not on this occasion, however, with the only comment of note remarking that the Bank’s balance sheet would not return to pre QE levels. Given that this was not new information, markets barely budged. This morning’s release of GfK Consumer confidence which printed at -27 was similarly unimpactful. Whilst this was up from a level of -30 recorded in April, the release has proved a poor indicator for the state of the UK economy since the Covid 19 pandemic. The speech by the BoE’s Haskel later today is unlikely to set any pulses racing either given its title: ‘New directions in the measurement of productivity: Integrating concepts and data’. Interesting for academics perhaps, but not for markets. More likely traders will be turning their attention to next week’s data, in particular the release of UK CPI, which is expected to show a drop of 2% YoY. This would more closely align the rate of UK price growth with those seen in Europe, and may prove the key to shift pricing for BoE rate hike expectations which have been sticky since the last BoE meeting at around 2 further hikes. As such, a paring of expectations on the back of the upcoming CPI release should lead the pound lower next week.


With much of Europe observing Ascension day yesterday, action across European markets was relatively light in contrast to the excitement occurring elsewhere. Despite this, markets have seen some significant developments in recent days, most notably seeing ECB pricing pushed through 3.75% in deposit rate terms on Wednesday, a move that extended in yesterday’s session. This uprating in ECB hiking expectations comes on the back of speeches from a large number of  policymakers following the most recent interest rate  decision, with comments being almost universally hawkish. This continued once again yesterday with Estonian central bank Governor Madis Muller sounding typically hawkish. More interesting were the remarks of Vice President Luis de Guindos, who noted a particular concern about the accelerating inflation in services. These comments are delivered in the context of other ECB speakers whose recent remarks have increasingly pivoted to focus on the role of labour markets and wage pressures as a driver of sticky inflation, particularly in the services sector. This is likely to be followed up later today, with speeches by ECB big hitters Schnabel and President Lagarde, providing ample opportunity to double down on the recent hawkish communications. For FX markets, however, the impact so far has been modest especially as the recent rise in US real yields has offset similar moves in eurozone bonds. Whilst this move may unwind as concerns around the US debt ceiling are eventually resolved, the euro appears to be content sitting on the sidelines for now at least, as events elsewhere take centre stage.


It was another positive session for US equities yesterday as markets received more constructive headlines from Congressional leaders, while earnings reports from consumer staples like Walmart also pushed back on recession concerns. Notably on debt ceiling dynamics, House Speaker Kevin McCarthy stated that he was confident a bipartisan deal could be presented to the floor as early as next week. However, once again, the positive mood in the equity space struggled to map over into FX land. This time around, the inhibiting factor was arguably the rally in US real yields, with the yield on the 2-year Treasury Inflation-Protected Security (TIPS) rallying 6.7bps on the day to reach peaks last seen on January 17th. The rise in real yields followed hawkish commentary from Dallas Fed President Lorie Logan, who has voting rights this year. Having previously advocated for “less frequent steps” in the hiking cycle and pausing the hiking cycle to assess the transmission of previous actions, Logan now states that “current data doesn’t justify a pause”. In conjunction with improving sentiment over the debt ceiling, and thus a reduced possibility that the Fed needs to cut rates to protect the US economy from a default induced recession, Logan’s comments helped lift traders bets on another rate hike from the Federal Reserve. After trading flat at the beginning of the month, money markets are now pricing in a 30% probability that the Fed hikes again at its next meeting, against our expectations. The more optimistic pricing of the Fed funds rate isn’t just isolated to the June contract either, as traders also trimmed expectations of rate cuts in the second half of this year to just 52bps. This is consistent with the view taken at the start of the year, before hot data led to the Fed’s terminal rate rising towards 6% and the regional bank runs induced over 80bps of cuts to be priced in.

Today, with the feel good factor spreading from US equities to shares in Asia and futures in Europe, there is a mild risk-on tone in FX markets. Further assisting the fight back from G10 currencies against the greenback is a marginal decline in US Treasury yields, especially at the front-end of the curve as the 2-year is now back above 4.2%, and an improvement in USDCNY after the PBoC pushed back against yuan depreciation slightly this morning. Price action in both offshore and onshore yuan this week has set the mood overnight for markets, with both currency pairs sliding through the sensitive 7.00 level earlier in the week on weak activity data for April. However, a mild improvement in both currencies this morning is definitely setting a better mood for markets heading into the weekend. Today, eyes stateside will be on Fed commentary once again as Chair Powell is scheduled to speak alongside former Fed Chair Ben Bernanke in Washington at 16:00 BST, while Fed Presidents Williams and Bowman are scheduled to speak earlier at 13:45 and 14:30 BST respectively. Positioning will also likely play a role in today’s price action as President Biden is scheduled to speak late Sunday where an update on negotiations is expected.


The Canadian dollar proved once again to be the best defensive play in the G10 against a stronger dollar. Behind the loonie’s continued outperformance yesterday was the fact the chances of another Fed rate hike in June, which was the supportive factor for the dollar, is now aligned with that for the BoC next month following stronger-than-expected inflation data early this week. It was on that topic that both Bank of Canada Governor Macklem and Deputy Governor Rogers were questioned on heavily yesterday, despite their best efforts to keep the press conference focused on the output of the Financial Stability Report which had been published earlier that day. Nonetheless, with all journalists’ questions trying to prise more information out of the BoC leadership on the direction of monetary policy, Governor Macklem ultimately caved in and shed some more light on the topic. He noted that the April CPI report “did come in higher than [the BoC] expected” but specifically focused on the improvement in the annual core and services measures. This was interesting given the previous emphasis from the BoC was on the annualised 3-month rate, given it was a more timely measure of inflation momentum. The shift back to placing the emphasis on the annual measures, which conveniently showed some slight improvement due to base effects, suggests that the BoC may not hike rates as early as the June meeting. While this was the main risk to our updated call of a June hike, we note that with the Fed more likely to hike next month and the BoC’s previous sensitivity to widening interest rate spreads with the US, the chances of a hike next month remains higher than markets are currently pricing. In fact, we think the shift in emphasis from Macklem was in order for the BoC to retain optionality at its next meeting, especially given national account data is due out at the end of the month, as opposed to directly pushing back on the idea of another immediate hike.

FX Elsewhere

The Mexican peso sold-off slightly on Banxico’s decision to unanimously hold its reference rate at 11.25% yesterday evening. The damage to the peso was largely offset by two factors. Firstly, after Mexico’s April inflation report, consensus expectations looked for Banxico to hold rates and outline that this was in fact their terminal level. Secondly, within the policy statement, the central bank highlighted that it would hold the overnight rate at the current level for an “extended period of time”. With inflation set to continue cooling, Banxico’s commitment to not ease policy in the near-term meant that investors can expect a continued improvement in Mexico’s real interest rate, which is supportive of further capital inflows. Nonetheless, despite the hawkish hold, the Mexican peso still ranked as one of the worst performing currencies in the expanded majors yesterday, behind other favoured carry currencies like HUF and PLN and Scandi FX. This was largely due to USD dynamics, with rising US yields eroding the carry of some positions and weighing on traditional funders. With US yields declining this morning, and with an improved equity backdrop, MXN may spend today retracing yesterday’s declines. It is already 0.3% higher overnight.



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