News & Analysis


Following an extended bank holiday weekend, sterling began today where it left off against the euro last Thursday and down around half a percentage point against the dollar, with much of the day’s early trading spent clawing back those losses. The theme of returning to business as usual is not just limited to the pound however, with BRC like-for-like sales data out this morning printing unchanged at 4.9% YoY. Whilst under more normal economic conditions this would suggest robust growth, with CPI inflation currently reading in double digit territory, today’s data represents a consumer that continues to face a squeeze in real disposable spending. The economic pressures facing British workers are showing up elsewhere in the UK economy as well, with today marking the first of four days of strikes by junior doctors. In this, they join large swathes of the public sector in taking strike action, seeking substantial pay rises to offset the inflation induced erosion of pay. However, for now at least, the UK government does not appear inclined to concede, meaning that industrial action by the public sector is set to be an ongoing feature of the UK economy for some time yet. For policymakers at the Bank of England, though, this is likely to come with a silver lining. Pay restraint by government and weakening consumer spending all point in the direction of a monetary policy stance that is beginning to weigh on the UK economy, and therefore one that will bring down inflation in line with the Bank’s forecasts. In our view, this reinforces the likelihood of the MPC holding rates at the upcoming May meeting, with Bank Rate currently at 4.25%, with CPI data out next week being key for confirming this call. As far as sterling is concerned then, if the BoE is now at a suitably restrictive terminal rate and with no cuts on the immediate horizon, the story of the next few months looks likely to be for a currency seeking new catalysts to move it out of current trading ranges.


The single currency continued to fall in yesterday’s session following Friday’s US jobs report, but the move occurred alongside closures in key European markets. With European bond markets, for example, now open, the single currency has consistently retraced yesterday’s drop and is threatening to return back to its pre-payroll range. As we highlighted in the USD section, today’s price action in markets is likely to be driven by the broader signal posed by the cross-asset space. That won’t be any different for the single currency as the domestic data calendar is free of any market-moving measures. Just the Sentix measure of investor confidence for April is released at 09:30 BST before eurozone retail sales data for February at 10:00 BST.


After numerous market holidays over the Easter weekend, the level of liquidity in major markets should return to normal today with most of Europe now back at their desks and with North American markets also fully open. The main driver of this morning’s price action remains the fallout from Friday’s payrolls figure, which came in a touch stronger with a net employment increase of 236k but showed signs of softness in the breadth of job gains and a further cooling in wage growth. Amid the lack of liquidity and the reduced trading window for US Treasuries on Friday, the net employment gain, which printed only 6k above the consensus estimate, drove a bid in the dollar as rate cuts were priced out of the US Treasury curve as the 2-year yield gapped back towards 4%. This move extended on Monday, specifically against US rate sensitive currencies such as JPY. However, as we had warned in our payrolls preview, with markets awaiting a read on how much credit conditions have tightened in the US, it was likely that a stronger-than-expected jobs report would be discounted by markets. That looks to be occurring this morning alongside the return of market liquidity as the overnight session has been dominated by a wide-ranging reversal of the long-weekend’s price action, at least in FX markets that is.

The conflict for traders to focus on the hard economic data or the more recent concerns over credit tightening is likely to remain on the centre stage this week as markets receive the latest inflation report from the US on Wednesday. Similar to the European measures last week, headline inflation is expected to fall considerably in March due to base effects on commodities, however, the pace of core inflation will be the area of focus for markets with expectations still fairly lofty at 0.4% MoM. If the core measure prints in line or even exceeds expectations, it will really throw the cat amongst the pigeons as it will heavily contrast with the latest reading from the New York Fed’s monthly consumer credit survey. Released yesterday, the data showed the share of households reporting that credit was harder to obtain versus a year ago had hit a record in March; a sign that credit conditions are materially tightening and should begin to weigh on core services ex housing inflation. Ahead of tomorrow’s release, the emphasis for markets will be on the more accurate cross-asset signal from Friday’s payrolls report, which may not become fully visible until the European-North American overlap. In terms of data, the NFIB’s measure of small business optimism is released at 11:00 BST before the Fed’s Goolsbee speaks at the Economic Club of Chicago at 18:30 and Fed’s Harker speaks at 23:00.


Yesterday’s daily trading range for CAD was the widest it’s been since last Monday’s weekend oil-gap driven rally. But despite the pickup in intraday volatility, the loonie went nowhere against the dollar upon the market close. Liquidity was thin with most of Europe still on holiday, and a lack of liquidity means that orders that would generally be too small to move markets could easily lead to outsized currency moves. For the most part, the trading session largely tracked alongside gyrations in equity markets that likely reflected flows and changes in risk premia, as there was a near-total drought of relevant news and data. Despite the lack of market-relevant information, yields rose considerably in Canada, with the 2Y up 14bps to 3.76% and the 10Y up 11bps to 2.89%. While this didn’t translate to outright loonie strength, it helped the currency withstand considerable losses in other G10 currency pairs. Today, with markets fully digesting Friday’s US data, price action in the loonie will likely better reflect the macro environment we now find ourselves in ahead of Wednesday’s Bank of Canada rate decision.



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