News & analysis


Sterling’s eventful week continued yesterday well after the release of inflation data early in the morning, with the pound managing to rally against both sterling and the euro as it appeared that Boris Johnson’s Government had made concessions to Conservative party rebels over its proposed internal markets legislation. The Internal Markets Bill has attracted criticism for clauses that breach last year’s EU withdrawal agreement, and therefore international law. Johnson’s Government reportedly agreed that the House of Commons must approve powers within the Bill enabling a unilateral breach of the withdrawal agreement. However, advocate-general for Scotland Richard Keen resigned over the legislation, saying it was “increasingly difficult to reconcile” with his obligations as a law officer. The climb-down from the Government is unlikely to be sufficient to appease the EU, while trade negotiations are ongoing and a reported legal challenge is also brewing in the event the legislation is ultimately passed into law. Democratic presidential nominee Joe Biden became the latest US politician to express support for the Good Friday Agreement and avoiding a hard border on the island of Ireland – something the UK Government continues to voice support for. Today at 12:00 the Bank of England’s latest rate decision will be announced, alongside a policy statement and meeting minutes. The Bank is not likely to change any policy settings, but has a number of issues to address. Firstly, UK economic data has been fairly buoyant of late, but the end of the Government’s furlough scheme presents a likely shock to incomes as unemployment creeps up. Secondly, fixed income markets seem to be pricing in a moderate chance of negative interest rates, despite the MPC expressing a fair amount of aversion to the idea.


The euro took on some water after yesterday’s FOMC meeting and spent a day in the red against the whole G10 currency board before regaining some of its grip this morning. The FOMC’s position will make any efforts from the European Central Bank to prevent euro appreciation all the harder as the Fed provided the most robustly dovish forward guidance in the US central bank’s history. The eurozone’s final Consumer Price Indices are scheduled for release throughout the morning, but are unlikely to ignite any huge market reaction unless they have significantly changed. The headline CPI for the eurozone is set to confirm a drop of 0.2%. If the figures turn out to print lower than expected, this may serve as another reminder for the ECB that more action may be needed to boost inflation.


The dollar rallied against the euro and a number of other currencies including CAD, SEK, NOK, AUD and NZD, but remained on the back foot against JPY, GBP, and a handful of emerging market currencies. Jerome Powell continued the Fed’s transition to a structurally more dovish monetary policy last night by ushering in greatly enhanced forward guidance aimed at making it clear the Fed intends to keep rates low for well into the future. Last night’s statement from the rate-setting Federal Open Market Committee promised to keep policy accommodative until “labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time”. The combination of the three conditions, and the fact that rate rises were explicitly linked to them, represent the strongest forward guidance issues by the Fed in modern history. The market reaction to the change was muted, and even slightly paradoxical – the dollar strengthened in places, while equity futures are pointing down. The US treasury curve was largely unchanged apart from a slight steepening in the difference between two year and ten year yields. All in all the reaction suggests that the Fed’s move was well priced-in by markets, which is unsurprising given the Fed’s months-long communications exercise which made the policy changes clear. Today’s data includes the manufacturing survey index from the Philadelphia Fed, weekly unemployment claims, and housing data, all at 13:30 BST.


A combination of a stronger economic outlook and the affirmation of lower rates for longer despite the positive growth and employment projections sent the dollar higher against the loonie in yesterday’s session. The commitment by the Fed to keep real rates negative for quite some time ran in line with its previous announcement of a shift to an average inflation targeting framework, but the prospect of this stimulus leading to a more rapid recovery in the US relative to Canada gave the greenback the all-clear to push higher against CAD. While the Fed provided little forward guidance on its QE programme to maintain as much flexibility in monetary policy as possible coming into the slower part of the recovery, further divergences in monetary policy may be found there in the near future. In line with the Fed’s dovish stance on inflation, the US QE programme may stick around a while longer than the Bank of Canada’s, which we expect to lead to a bout of CAD strength in the meantime should the economies recover at a comparable pace. For now though, USDCAD will spend the rest of the week recalibrating to the Fed’s latest announcement, while also looking ahead to next week’s resumption of Parliament on Wednesday and the potential for a snap election to be called.



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