News & Analysis


While the pound outperformed the euro for the majority of yesterday’s morning session, a string negative headlines soon dampened the spirits of GBP traders such that the GBPEUR pair closed the day out on relatively flat note after GBPUSD notched a 1.34% decline on the day. Despite the UK economy’s greater insulation from Europe’s energy crisis due to a more diverse supply network and reduced dependence on Russian gas, higher gas and electricity prices are still mapping over the channel. Inflating the situation is a workers strike in Norway, which could see gas delivery halt as early as Saturday according to Equinor, Norway’s state-backed energy company. With Norway now the largest source of UK gas, having overtaken domestic production for the first time last year to meet 42% of the UK’s demand, energy concerns in the UK are also ramping up. Political developments in the evening, although having no direct impact on currency markets, are also not conducive for GBP bulls. With Prime Minister Johnson under renewed pressure following resignations from Sajid Javid, Health Secretary, and Rishi Sunak, Chancellor of the Exchequer, political risk has only increased in the UK yet again as many within the Conservative party call for Johnson’s resignation. Today, with downside momentum carrying over from yesterday’s session, GBP traders will be keeping a close eye on energy benchmarks along with incoming commentary from BoE Chief Economist Huw Pill at 09:10 BST.


A sharp turnaround in the single currency following the European equity markets’ cash open set the tone for the remainder of the day as the single currency continued to depreciate to a fresh 20-year low as recession and acute energy concerns in Europe resonated yet again across global markets. The 1.5% one-day drop in EURUSD is relatively large by historical standards, but is especially dramatic given the levels the currency is now trading at and the fact that it occurred in such a light data session with no specific catalyst. However, as markets priced a weaker eurozone growth profile and reduced bets on ECB rate hikes across the curve, European energy benchmarks continued to grind higher. German baseload power for delivery next year, the benchmark European price, hit a fresh all-time high of €328.50 per megawatt hour before moderating, while forward gas benchmarks continued to climb higher towards March’s peak. Markets will be paying close attention to developments in the eurozone’s energy developments, and what it will mean for the economy’s production potential heading into the winter months, when trading European assets. Should the situation deteriorate further to the level where production constraints are imposed on German manufacturing, EURUSD may drop to parity. With the weakness in the single currency only set to exacerbate the stagflation environment in the eurozone, we believe the ECB may intervene in the coming days by moving its forward guidance for the July meeting to 50bp should further EUR depreciation occur.


Despite the limited data calendar, markets moved yesterday and they moved big in a big way. The broad dollar index, DXY, rallied 1.3%, a highly rare 3-sigma increase that was also broad-based as every single G10 currency depreciated against the US dollar. Furthermore, all G10 crosses against USD except JPY started to weaken at the same time: 8 am BST / 3 am EST, shortly after European markets opened. Nevertheless, there were no major news nor data catalysts to drive the initial sell-off in risk assets and haven bid for USD. From that, we infer that Tuesday’s market moves were likely driven by an increase in recession fears and overall bearish sentiment, and that inference is supported by the fact that the US Treasury yield curve inverted at a few different tenors, not least at the 2-10 year spread. Prior to the start of the North American trading session, the sell-off in US equity futures was more gradual than that in G10 FX, but the equity downturn was re-ignited and trading volumes surged as US traders returned to their desks from their 4th of July long weekend. Bonds rallied broadly across most developed market sovereigns, but the drop in yields was more pronounced outside the US, offering fundamental support to the DXY move. Later in the day, at 15:00 BST, equity markets rallied on a substantial factory orders beat, which accelerated to 1.6% in May from 0.3% in April despite the analyst consensus predicting a mere 0.5% increase. While that was sufficient to bring US equities back to green, with the S&P 500 closing at 3831, 0.16% higher than yesterday, and the Nasdaq up a substantial 1.75%, it only translated to a mild pullback in DXY. The dollar index peaked at  high of 106.792 before slipping to the mid-106 region at closing. This morning, upside momentum in the dollar sees the greenback continue to put pressure on the G10 currency board, with the exception of JPY. On today’s calendar, markets can expect an update on the US services sector as the final PMI for June is released just 15 minutes before the ISM services index at 15:00 BST. Barring any substantial adjustment to the PMI data, focus will rest on the ISM survey which is expected to fall from 55.9 to 54.0. Then, attention will turn to the release of the latest Federal Reserve meeting minutes at 19:00 BST, which should provide additional insight into the FOMC’s decision to deliver a 75bp rate hike and will probably give more context on Esther George’s dissent in favour of 50bps.


The loonie depreciated 1.33% against the US dollar amid the broad risk-off market environment yesterday. This marked a 2-sigma move and the biggest one-day rally in USDCAD since August 2021. The interest rate differential turned roughly 2-4bps less favourable for CAD across the yield curve, and the Canadian yield curve inverted slightly too. While the decline in CAD was large compared to its historical price action, it saw the loonie notch a middling performance relative to other G10 currencies. That was likely due to Canadian bond yields outperforming other economies, meaning that rate differentials were less of a fundamental headwind for the loonie despite the 6-10% decline in crude on the day depending on benchmarks. Today, only minor economic releases are scheduled out of Canada: international merchandise trade at 13:30 BST/ 8:30 EST, and Ivey PMI at 15:00 BST/ 10:00 EST.



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