News & Analysis

GBP

GBPUSD price action continued to be driven by external factors yesterday morning as broad USD strength weighed on the pair. However, at 12:00 BST, the pound took a fresh leg lower as Bank of England Governor Andrew Bailey spoke at the Bruegel Institute and highlighted the two-sided risks to the Bank’s current plan to continue tightening policy. In an environment where core yields were rising across the board as central banks, like the Federal Reserve, set out their stalls to aggressively tighten monetary policy, commentary by Bailey regarding more restrained tightening highlighted the increased probability that UK rates won’t get close to the levels seen in other G10 bonds. Today, the data calendar includes just net consumer lending data for February, which is released at 09:30 BST.

EUR

EURUSD trades in a tight range this morning after a mixed session yesterday following an uptick in US Treasury yields and a mixed market mood. The focus today remains on the war in Ukraine and peace talks that are set to continue again today. On Monday, the Financial Times reported that Russia was no longer demanding Ukraine to be “denazified” in ceasefire talks and that it will allow Ukraine to join the EU if it abandons Nato aspirations. Even if the talks offer some respite for the euro, downside risks to EURUSD due to rising US yields are still prominent. This morning’s data calendar included a sharp contraction in the GfK consumer confidence index in Germany which fell to -15.5, from a downwardly revised -8.5 and below the consensus of -14.0. The drop is a clear sign that Russia-Ukraine and higher inflation are weighing heavily on consumer sentiment.

USD

Yesterday’s surge in front-end Treasury yields provided some support for the US dollar but not as much as it usually does, leaving some space for further appreciation if FX markets catch up with the moves in bond markets. This is especially the case as several Fed members have communicated openness to some degree to 50bp rate hikes in the near future as inflation expectations see no signs of calming down. Adding to inflationary pressures are China’s Covid lockdowns. Shanghai tightened its lockdown as cases jumped again today, and is barring people from leaving their homes. This further weighs on global supply strains along with the war in Ukraine, which can embolden inflation expectations further. On the data front, markets will focus on the first piece of jobs data today as JOLTS job openings are scheduled for release at 15:00 BST. Beyond that, Fed speakers John Williams and Patrick Harker will speak at 14:00 and 15:45 BST.

CAD

The Canadian dollar fell sharply on Monday before regaining over half of its losses by the North American close. Falling prices in crude oil, which represent 13% of Canada’s exports, and a sudden shift in US equity performance upon the cash open were to blame for the initial weakness in CAD. One trigger for the weakness in crude oil yesterday was the announcement that Shanghai was entering another lockdown. China as a whole is still wedded to its “COVID zero” strategy, which aims to minimise COVID cases through harsh restrictions on movement. As a result, an estimated 62 million people are still in lockdown across the country, reducing demand for crude oil by roughly 600,000 barrels a day. Nonetheless, with economic fundamentals still strong in the Canadian economy, markets had largely shrugged off the development by late afternoon, with the loonie strengthening to cap losses on the day at just 0.33%. On today’s calendar, Canada releases employment figures from the Survey of Employment, Payrolls, and Hours. This survey is quite lagged, meaning it’s largely ignored by forward-looking markets, but its high-quality administrative data present a highly accurate snapshot of Canadian labour market conditions.

 

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