News & Analysis


The pound fell back from recent highs in yesterday’s session as a bout of USD strength dominated markets, with Russia stepping up its assault on Ukraine. While the pound was more resilient to risk-off waves in recent sessions, cable fell to a near 1-week low this morning on the back of the deterioration in risk sentiment. On top of that, a significant fall in UK bond yields further undermined the pound as money markets erased bets for a 50bps BoE rate hike this month and pushed back wagers on 100bps of tightening to December from August. The 10-year yield dropped the most since the day of the Brexit referendum outcome in June 2016, while the 2-year dropped to just above the 0.80 level. BoE hawk Michael Saunders stated yesterday the surge in energy prices accounts for quite a lot of the inflation overshoot, but added that inflation expectations are not as well anchored as he would like and that energy prices would need to rise further in order to generate a sustained inflation overshoot. Catherine Mann spoke too and noted that 5% wage rise expectations show “embedded” inflation. At 18:30 GMT today, MPC member Tenreyro will speak on the outlook for the UK economy while Cunliffe will speak at the Oxford Union at 20:00 GMT.


This morning’s session saw EURUSD fall to levels last seen in June 2020 after yesterday’s risk-off conditions had already led to a 1% daily drop from high to low amid escalation in restrictions on Moscow. European commodity prices continue to rise, with benchmark coal rising 15% to a new record while European gas prices rose as much as 22% on fears of flow cut. Today’s data releases are plentiful, with Spain and Germany releasing unemployment data throughout the morning while the eurozone preliminary CPI figures are released at 10:00 GMT. The CPI figures come after yesterday’s inflation data from Germany and Italy rose to record-highs with energy prices being the key driver. The inflation data adds to fears of ongoing elevated inflation, especially as the data period does not encompass the figures since Russia’s invasion into Ukraine, and the war has only added continued upward pressure on energy prices. Also on the calendar will be speeches by European Central Bank members Luis de Guindos and Philip Lane at 11:00 and 16:00 GMT respectively.


Markets saw renewed safe haven flows yesterday and this morning after Russia stepped up its assault on Ukraine. Russia’s Defense Ministry said this morning that its forces had captured Kherson, a Ukrainian port, after the government in Kyiv said overnight that troops were moving toward the city. US President Joe Biden called Vladimir Putin a dictator in his first State of the Union address last night, and said the Russian president would pay a high price for his invasion of Ukraine. 10-year Treasury bond yields fell on the back of the intensifying war, with the move coming ahead of Fed Chair Powell’s testimony today. While much of the economic data has receded into the background in recent sessions due to the focus on geopolitics, market participants will eye Powell’s testimony given the latest moves in Treasury markets. With inflation already running hot, there is a concern that policy makers have no choice than stepping up the pace of rate hikes while growth concerns are arising at the same time. Powell can use his testimony tonight to either confirm or assuage those fears, although the focus is likely to remain on flexibility for now.


The Canadian dollar pared back gains throughout the latter part of yesterday’s session after crude oil prices had initially pushed the loonie up higher on Monday following the sanctions from the West. Yesterday’s session saw the US dollar rise along with other safe havens as the Russia-Ukraine conflict is weighing on global growth expectations and risk appetite, but unlike on Monday, the higher oil prices were not enough to offset CAD price action and drive an appreciation in the Canadian dollar. Instead, it limited CAD losses relative to other G10 currencies. In today’s session, all eyes will be on the Bank of Canada which is expected to start its hiking cycle at today’s policy meeting. Despite speculation over a 50bp hike, we think the BoC will decide to stick with its recent precedent and hike by 25bp increments starting today. On quantitative tightening (QT), we expect the Bank to prime markets for its arrival in April rather than announcing such a policy today, although we deem the risk of earlier QT higher than a 50bp hike today. The currency impact of a 25bp hike may be more limited, while a hawkish surprise in the form of a larger rate hike or QT announcement will likely see the Canadian dollar outperform in the G10.


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