News & Analysis


The focus for much of yesterday’s excitement came with the publication of UK inflation data. For those looking for a surprise reading that could move markets, this release did not disappoint. UK CPI came in significantly hotter than expected at 10.1%. Whilst this did mark a fall from February’s 10.4%, this was significantly above pre-release expectations of 9.8%. This trend was continued in core inflation which repeated last month’s print of 6.2%, despite a decline to 6.0% being anticipated. The market response was swift, fully pricing a rate hike from the BoE in May, and two further hikes for later this year. Coming on the back of an upside shock in Tuesday’s wage data and the unexpected jump in CPI in February, it now seems untenable for the Bank of England to now hold rates at 4.25% at the upcoming May decision. For this reason, we are updating our view for BoE hiking and now look for a final 25bp in May, with no rate cuts this year. Despite the uprating of expectations for BoE hikes from both markets and analysts, the reaction of sterling was somewhat mixed, with the pound struggling to make gains on the back of the release. Whilst GBP did initially spike around 0.4% against both USD and EUR  in the immediate aftermath of the print, it spent much of the remainder of the session giving back some of those gains, a trend that has continued this morning. In our view, this limited price action is a sign that rate hikes are no longer unambiguously positive for sterling. With markets increasingly weighing growth prospects and downside risks from further hiking, and is a dynamic we expect to continue as the pound searches for a new catalyst.


The lack of major economic events in the eurozone yesterday saw markets spending much of the session searching for a catalyst to swing EURUSD one way or another, and despite comments from not one, but two ECB board members in the form of Isabel Schnabel and Phillip Lane, markets still found little to hang their collective hats on. Hopes for more action in today’s trading look likely to rest on the contents of the March policy meeting minutes, due to be published at 12:30 BST. We are not holding our breath, however. Given the level of uncertainty faced by ECB members back in March, it does not seem likely that markets will be able to infer too much from these minutes, in particular on the debate over hiking 25 vs 50bps in May. It seems more likely therefore that the attention of markets will instead begin turning towards PMIs, published tomorrow morning, and a eurozone CPI reading for April that is due next week, as a better steer for the upcoming policy decision.

Standing in direct contrast to the euro’s stability yesterday was wild price action in both NOK and HUF. While for the Norwegian krone the level of intraday volatility has become a well-known story of poor liquidity, there was a fundamental reason for the 2.07% spike in EURHUF. Speaking to the Hungarian newspaper the Vilaggazdasag daily, the Deputy Governor of the Hungarian central bank stated that the upper rate on the interest rate corridor could be lowered at next week’s meeting, starting a “multi-step” path to rate normalisation. The surprise comments mark a U-turn from the central bank following months of defying pressure from the Hungarian government to lower interest rates as they aimed to bring inflation down from 25% and offset pressure on the forint. Should the MNB fulfil Barnabas Virag’s guidance at next week’s meeting, it is highly likely that the emergency one-day deposit rate, aimed directly at supporting HUF appreciation, will be lowered from an EU high of 18% in the coming months. For the forint, which has been the best performing carry currency year-to-date, the tides may have just started to turn.


The broad dollar danced to the tune of the US 2-year yet again yesterday in what was once again a fairly benign session for G10 FX, with just the illiquid NOK showing some serious volatility. The DXY index rose 0.26% on the session, oscillating in this week’s trading range for yet another session, with all G10 currencies bar GBP and NZD losing ground to the greenback. As mentioned, continued upwards momentum in front-end Treasury yields was behind the move higher in the dollar as traders once again trimmed expectations of Fed easing over the second half of the year on concerns of persistent inflation. For once these concerns weren’t fostered domestically, but instead blew in westward over the Atlantic after UK inflation data didn’t show the promising signs of disinflation that analysts had expected. While the domestic news flow didn’t prove too impactful for markets, it did provide some insight into the state of credit conditions.  The Fed’s beige book of regional economic conditions highlighted that in recent weeks lending volumes and loan demand had declined generally across consumer and business loan types, while several districts noted banks had tightened lending standards amid increased uncertainty and concerns about liquidity. In addition, New York Fed President John Williams, who arguably sits closest to monitoring aggregate credit conditions amongst the FOMC given the New York Fed’s role in conducting open market operations, stated that he expected tighter credit conditions to weigh on spending but that it still remains “too early” to measure the magnitude of these effects when he spoke at an event held by NYU. While suggesting that monetary policy remains somewhat tighter than the 4.83% effective Fed funds rate suggests, the ultimate takeaway for markets was that there is limited reason to suggest the Fed won’t hike 25bps at next month’s meeting.

Given the subdued nature of G10 FX yesterday, attention started to drift to the EM complex where price action in HUF (see EUR section) and BRL caught the eye. Specifically in Brazil, investors continued to vote on President Lula da Silva’s fiscal framework with their feet, leading to USDBRL climbing 1.8% on the day in local trading. The continued sell-off from Tuesday’s announcement occurred despite a public endorsement from BCB Governor Roberto Campos Neto, which is significant considering soured relations between the government and the central bank had undermined investor confidence for much of Q1. Today, focus will continue to rest on BRL in the LATAM space as traders monitor how extensive the shakeout will be.


After proving fairly resistant to broader dollar moves throughout much of this week, the Canadian dollar sold off 0.5% in yesterday’s session. While a renewed decline in crude below $80 per barrel and slight weakness in US equities didn’t help the loonie, it was likely headlines surrounding Canada’s largest federal strike in decades which stimulated the sell-off as analysts were quick to highlight how the walk-out by 150,000 civil servants would likely impact growth. Although the impact from a market perspective is likely isolated to just sentiment at this point in time, markets will likely remain jittery to developments over the coming weeks should the strike action persist to the point that it has second round effects for the economy.



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