Sterling traders are looking for direction but are unwilling to take positions ahead of the slew of Bank of England speakers and UK GDP data later this week. Tomorrow, BoE Chief Economist Huw Pill will comment to the media, while Governor Andrew Bailey is set to speak on Thursday, but with the calendar being lighter at the start of the week, GBPUSD has been trading fairly flat since Monday. Press rumours around UK politics and the party gate report continue to circulate, but for now there are not enough MP letters to trigger a leadership election.
The euro remained supported around key levels in yesterday’s session following last week’s hawkish European Central Bank meeting and the markets’ repricing of the ECB rate path, however this morning the currency took on some water after European power prices spiked. The move in energy prices came after France, the EU’s biggest producer, cut its nuclear output target for a second time in a month, which markets saw as the latest sign that the energy crisis is far from over. Increased energy prices in the eurozone can add to inflationary pressures, however this is difficult for a central bank to tackle as monetary policy is aimed at the entire economy rather than a subcategory like energy, and tightening policy in response to this will reach the entire economy but it won’t stop the energy crisis as supply issues remain. ECB President Christine Lagarde spoke out to the media yesterday and sounded more dovish than in the meeting last week, as she stated there is no need for major policy tightening and steps to normalisation will be gradual. Her comments failed to soothe markets, as expectations for higher rates remain largely unchanged after her speech. Today’s calendar is light, which means markets will focus on broader macro developments and geopolitical headlines, along with a speech by the ECB’s Francois Galhau de Villeroy at 17:00 GMT.
Yesterday’s price action in the G10 space was mixed, with AUD and CAD inflicting the most damage on the greenback and the dollar rallying against EUR, GBP and NOK. Cross-asset correlations didn’t line up with the performance of certain FX pairings, suggesting the moves in the FX space were largely idiosyncratic and driven by a readjustment after Friday’s nonfarm data. This morning, the US dollar is back benefiting from higher Treasury yields, with both the 2-year and the 10-year shooting higher this morning as traders position themselves ahead of Thursday’s US CPI reading for January. President Joe Biden spoke with Germany’s Olaf Scholz yesterday and stated the Nord Stream 2 pipeline would be stopped if Russia invades Ukraine. This would mean EU gas supply could no longer be used by Russia as a means of retaliation against the sanctions, which can help soothe volatility in energy markets. Earlier, the US communicated to support the EU if gas supply is cut off. Today’s calendar is fairly light for the US, with trade balance data at 13:30 GMT being the main release of note.
Price action in markets was mixed yesterday. North American indices traded lower at the margin, bond markets continued their sell-off and WTI shed half a cent to trade close to the $90 per barrel level. Despite all of these cross currents for the loonie, the Canadian dollar led gains in the G10 FX market along with AUD in what was a narrative across asset classes. Rising 0.63% against the dollar over the course of the day, the loonie reversed Friday’s nonfarm payrolls induced losses to return to the top of its recent range despite front-end rate differentials continuing to narrow. This morning, with oil under pressure yet again as attention returns to the Iran nuclear talks today and yields continuing to push higher with Treasuries leading the way, the loonie has begun to retrace yesterday’s gains at the margin. Little is scheduled on the data calendar for today, with December’s international merchandise trade data at 13:30 GMT unlikely to move the needle.