News & Analysis


After touching fresh lows last seen in October 2020 against the dollar in the early hours of yesterday’s session, the pound has retraced slightly as it trades in the middle of its four-day range this morning. Strong labour market data for January and February helped lift the pound from the doldrums yesterday as it reinforced the view of many that the Bank of England will hike rates again on Thursday. The next few days are pivotal for sterling bulls, not only due to the historical low GBPUSD is trading at but also due to the 2.5% decline in GBPEUR over the past fortnight. Given the buoyancy in the dollar over the course of this week due to higher US yields, tonight’s FOMC meeting will be crucial to see if markets have truly gotten ahead of themselves in pricing in a more hawkish Fed. While a 25bp hike is likely and is our base case, the emphasis will be on forward guidance and whether the Fed’s dot plot can come close to the 7 hikes predicted in overnight interest rate swaps. Additionally, the language around the risks to the Fed’s economic projections from the war will be key as they may caveat any decision such that fewer inferences can be taken for subsequent meetings. Given the close proximity of the Fed and the BoE meetings, policy divergence is likely to be pivotal for GBPUSD over the coming 36 hours.


While FX markets kept a close eye on Russia-Ukraine peace talks yesterday, the moves in US front-end yields were also a big driver in EURUSD price action as markets positioned themselves ahead of today’s FOMC meeting. Ukraine and Russia continue talks today after a paused discussion on Monday and resumed conversations on Tuesday led to cautious optimism in markets, even though actual promising headlines were sparse. This helped European currencies moderately pare back losses from last week. Yesterday, a key adviser to Volodymyr Zelenskiy called negotiations difficult but said there is room for compromise, while Vladimir Putin said Ukraine is not being serious about resolving the war. With modest de-escalation in the background, a more cautious FOMC meeting tonight may provide the impetus for a more substantial rebound in EURUSD this evening. Given the right mix of caution from Chair Powell in the press conference, and other members in the dot plot projections, the single currency could return to last week’s highs. On the monetary front, European Central Bank policymaker Luis de Guindos highlighted there is no risk of recession in the eurozone, which is a strong statement given the ongoing uncertainties around the war, but may soothe some concerns around eurozone growth regardless. He added that policy normalisation does not imply an immediate rate hike, which reflects the latest changes to the ECB statement which signalled the central bank has no intention of raising rates until some time after it has ended asset purchases.


The Federal Reserve will be up for a challenge today as it will have to weigh surging inflation against the uncertain outlook over the war, complicating the case for policy normalisation. Markets and the Fed both seem to agree on the fact that today will mark the first quarter point rate hike since 2018 after Fed Chair Powell downplayed the chances of a 50bp hike to Congress a few weeks ago. Due to the commentary, market expectations have also shifted down from 50bp to just over 25bp of hikes. The FX volatility upon today’s release is therefore likely to arise from changes in individuals’ rate projections via the dot plot and talks over quantitative tightening rather than the actual rate hike as the FOMC will almost certainly raise rates by 25bps today. The outdated December projections signalled three rate hikes in 2022, but given the recent inflationary shock, this is likely to be revised aggressively by most members. This time around, we expect the dot plot to signal five hikes this year, which would give the most neutral FX outcome. Markets would perceive a dot plot signalling four hikes as dovish, while 6-7 hikes would be very hawkish as this would be in line with the aggressive market pricing of a rate hike at every Fed meeting this year.


The Canadian dollar rallied half a percent against the US dollar on Tuesday as markets struck a risk-on tone. Equities led the loonie’s charge with the S&P 500 stock index posting a 2.1% gain, an increasingly rare sight given that roughly two-thirds of trading days have seen equities close in the red since Vladimir Putin’s invasion of Ukraine. February housing starts, a leading indicator of the economy, suggested a strengthening outlook for Canada as CMHC reported 247.3k new construction projects for the month, which is 30.5% higher than the 30-year historical average, with the release beating both expectations and last month’s print. Oil prices fell again, pushing the nearest dated delivery contract for WTI below $100 and near to levels last seen prior to the invasion as renewed lockdown measures in China weighed on the demand outlook. Today’s calendar events will be highly salient for FX markets as we’ll be getting Canada CPI and US retail sales at 12:30 GMT, as well as the Federal Reserve rate decision at 18:00 GMT. The Fed is highly likely to follow the Bank of Canada and raise rates by 25 bps. See our most recent Week Ahead document for more.


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