News & Analysis


The pound continued Friday’s freefall in yesterday’s session, dropping another percentage point against the dollar. However, unlike on Friday, the pound’s losses were contained against the euro as the bearish GBP drivers broadened. While poor consumer data on Friday continues to weigh on sentiment, especially around expectations for May’s rate hike from the Bank of England, broader market volatility drove sterling losses yesterday. This morning, data out of the UK showed public sector net borrowing excluding banking groups come in at £18.1bn, £1.7bn below expectations. That being said, cumulative borrowing for the 2021/22 fiscal year sat at £, marking the third-worst year for public finances since 1947. This casts doubts over the amount of fiscal headroom the Chancellor of the Exchequer has, especially as growth forecasts are downgraded while inflation is set to remain high. With the Bank of England observing a communications blackout ahead of next Thursday’s meeting, and economic data largely absent for the week, the pound trades at the mercy of broader market dynamics today.


EURUSD had been falling sharply for three sessions straight with several downside narratives weighing on the pair, before price action consolidated somewhat this morning. Fears of low economic growth and high inflation in the eurozone, combined with a stronger US dollar on the back of rising US Treasury yields, means the pair is hovering just above a key psychological support level. Firmer expectations of a more hawkish ECB could prompt traders to turn slightly more bullish on the single currency as it trades at lows not seen since March 2020, however, it has only been the more hawkish ECB members that have discussed their preference for rate lift-off in July this year. Latvian central bank Chief Kazaks stated yesterday there is room for as many as three hikes this year, in line with market expectations, while he also said ending the asset purchase programme in early July is appropriate, however Kazaks is on the more hawkish side. ECB President Lagarde already stated on Friday that bond buying will likely end early in Q3, while she also agrees there is a strong likelihood that rates will be hiked before the end of the year. The number of rate hikes, or the timing of lift-off, however, she left undisclosed. With the economic calendar populated with ECB speakers at a time when both the BoE and the Fed observe a media hiatus, focus will be on any change in stance from dovish ECB members and how far that could take EURUSD. The extent of which largely depends on the profile of the speaker and whether markets have more concerns around high inflation than low growth. This will largely depend on the economic impact of the war in Ukraine. At the moment, growth concerns are higher than last week with European equities having taken a hit yesterday and market expectations for rate increases in the eurozone having dropped from around 85bps last week to 71bps currently. Elsewhere in Europe, the National Bank of Hungary is set to hike its key rate by 100bps today.


The US dollar looks to be in consolidation this morning after the bout of strength on Monday that was caused by a repricing of lockdown risks in China. That panic has eased somewhat after measures the PBOC announced fresh measures to accommodate the economy, including a cut to the Reserve Requirement Ratio on FX contracts, but uncertainty still remains high with concerns around expanded and extended lockdowns being prominent. For today, some focus will be on the release of the April Conference Board consumer confidence at 15:00 BST, shortly after the release of preliminary durable goods data for March at 13:30 BST, but we expect this to have little impact on market pricing of the Fed rate path. Beyond that, economic events out of the US are light as markets position for next week’s Fed meeting.


Fears that China’s renewed struggles in fighting Covid-19 would hamper demand continued to negatively spill into global market sentiment. The Canadian dollar weakened two tenths of a percent against the US dollar as investors seeking safe haven piled into the American currency. The loonie’s weakness was first amplified, then dampened by falling oil prices that retraced some losses late in the day. While testifying to the House of Commons’ Standing Committee on Finance, Bank of Canada Governor Tiff Macklem hinted strongly at the sizing of the Bank’s next interest rate move. He said that the Bank “will be considering taking another 50 basis point step,” which is in line with market pricing and also our call for the next meeting. The Governor poured some cold water on recent speculation that the Bank could go even larger with a 75bp move, characterising such a shift as “highly unusual.” Despite overnight volatility, the loonie opens the European session this morning flat.

FX Elsewhere

33 fresh Covid cases were reported in China’s capital on Monday, spurring authorities to announce mass testing for most of Beijing’s population. Some media reports have pointed to limited stockpiling behaviour amongst residents in preparation for a lockdown, which is a possible scenario given the current Covid-zero policy. No restrictions have been announced so far, but the PBOC pledged it will increase its support for the economy via monetary policy tools and will also promote a healthy and stable development of financial markets. Additionally, the PBOC cut its FX Reserve Requirement Ratio (RRR) by 1ppt. Cutting the FX RRR lessens the incentive for commercial banks to hold more in FX reserves, implicitly dropping demand for the US dollar while boosting CNY supply. Although the cut could be seen as a response to the recent CNY depreciation, the offshore yuan is only trading marginally stronger than Monday’s lows as the decision for the PBOC fix fell in line with expectations, and could even indicate to markets there is a certain reluctance from the PBOC to use this tool more aggressively for pushing back against CNY depreciation. Volatility in Chinese markets is reverberating across other FX pairs and markets during the APAC session, with the lower growth profile in China specifically weighing on the currencies of key trading partners such as New Zealand and Australia.



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