News & Analysis


Sterling surged 1.4% against the dollar yesterday following strong headline wage data in March’s labour market report as traders started to factor in a more hawkish Bank of England reaction function once again. The one-day rally in the pound was the largest since the 21st of October 2020 and was primarily driven by the 20.9 basis point rise in the two-year Gilt yield– the largest move since early March 2022. Back in March, Gilt yields were being dragged higher by global inflation concerns in the aftermath of the Russian invasion of Ukraine. Sitting at 1.416% at the time of writing, front-end Gilt yields are more representative of the likely BoE hiking path in our view, as money markets continue to price in an extreme hiking scenario. At one point in yesterday’s session, overnight index swaps fully priced in five more 25bp hikes from the Bank of England this year, which is a monumental stretch in our view. It wasn’t just the readjustment in UK rates markets that assisted sterling, but also its cheap valuation relative to its economic fundamentals. This morning, however, sterling isn’t trading with the same momentum. Trading 0.4% lower against the dollar and 0.13% lower against the euro, the pound is retracing part of yesterday’s move as the US dollar strengthens on renewed hawkish rhetoric from the Federal Reserve and still lingering growth fears globally. The move in the pound coincides with April’s CPI report, which showed UK inflation hitting a 40-year high of 9% when released this morning at 07:00 BST. Most of the inflation impulse came from Ofgem’s 54% increase in the default tariff cap for household electricity and gas bills, which contributed 2.1 percentage points to the headline figure from just 0.7 percentage points back in March, and from other commodities such as motor fuel (+31.4% YoY) and food (+6.7%). However, the inflation data still marginally undershot both consensus and the Bank of England’s estimate of 9.1% and is likely to show a near-term peak in price growth. With two major pieces of UK data now released this week, focus swiftly turns to how the consumer is holding up against higher prices amid a somewhat more supportive wage backdrop than initially assumed. Friday’s GfK consumer confidence data for May and April’s retail sales data should be able to fill the final piece of the puzzle for the Bank of England.


The single currency followed the pound higher in yesterday’s session, with EURUSD notching gains of 1.16% over the course of the session. The euro rally wasn’t primarily driven by a tighter range in GBPEUR, but in fact more hawkish commentary from ECB Governing Council member Klaas Knot. Speaking on Dutch television, the central banker largely confirmed that he supports hiking rates by 0.25% at the July meeting, but kept the door open for a larger rate hike if incoming data shows inflation pressures broadening or accumulating. This was the first time an ECB member mooted the possibility of a 50 basis point hike, and although it should be taken with a pinch of salt given Knot’s reputation as a hawk among the ECB, it didn’t stop money markets from extending their already stretched views on the ECB’s normalisation path this year as overnight index swaps priced in 100bps of hikes. Similar to GBP, however, the euro’s depressed value prior aided in the rally once Knot provided a catalyst for traders to turn more bullish. In addition to the ECB comments, the preliminary Q1 GDP report out of the euro-area also surprised to the upside at 0.3% QoQ.  This morning, some of yesterday’s euro gains are being trimmed at the margin, but the single currency remains over 1.5% higher than last week’s lows—an area that invited speculation over parity being reached. Today, there is very little on the eurozone economic calendar beyond final inflation readings and ECB’s Muller at 10:00 BST.


Yesterday’s US data showed continued strength of the American economy, both on the consumer and the producer side. Retail sales grew 0.9% MoM in April, accelerating strongly from the 0.5% print the month prior. Core retail sales were also strong, signalling consumer strength. Meanwhile, data released shortly afterwards saw industrial production rise 1.1% in April, blowing past expectations for a 0.5% gain and increasing from March’s 0.9% increase. However, markets were sceptical of the data releases, especially retail sales due to its volatile nature and the fact that it measures the total value of sales as opposed to nominal sales volumes. This means that inflation effects can initially play a positive role in the retail sales figures, especially in April when monthly price rises were still significant, before they start to weigh on consumer demand and drag the headline retail sales figure lower. The main dollar surge came overnight following comments by Fed Chair Powell. Speaking at a WSJ event, the Fed Chair stated that the central bank won’t hesitate to raise rates above neutral, which is currently estimated at around 2.5%, if the need arises for tighter financial conditions. Powell also warned that this could bring discomfort, a marked turnaround from his confidence in a “soft landing” back at the May 4th meeting. Chicago Fed President Charles Evans doubled down on the hawkish rhetoric, saying that front-loaded hikes are needed to restrain inflation, adding that he expects the Fed to go past neutral. These comments are weighing on G10 currencies this morning, with some of yesterday’s larger gainers leading the losses this morning.


CAD strength on Friday and Monday meant the loonie lagged the broad G10 move higher against the dollar in yesterday’s session. In fact, the loonie was the worst-performing G10 currency against the greenback apart from JPY yesterday, with the yen under renewed pressure from higher global bond yields. The limited rally in the loonie yesterday suggests that any losses today are likely to be contained as markets look to fade yesterday’s broad USD weakness. Today, April’s CPI data out of Canada at 13:30 BST/ 08:30 ET will be the sole area of focus for CAD traders. Headline inflation is set to stay stable at 6.7%, while the average of the Bank’s three core measures is expected to grind slightly higher to 3.83%. Any increase in the inflation data will only spur expectations of a more aggressive hiking path from the BoC and could see the Canadian dollar outperform in the G10 space today.



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