News & Analysis


Signs of potential peace in eastern Europe failed to lift UK assets yesterday. The FTSE 100 closed just 0.86% higher, while the pound closed the day out flat after initially rallying 0.5%. The UK’s more limited economic exposure to the war is likely the reason for GBP underperforming other European currencies, while scepticism over the true intentions of Russia during the current phase of peace talks also likely limited the reaction. This morning, the pound is playing catch-up to the rest of the G10 as it sits 0.2% higher against the dollar. Despite the rally, the pound continues to lag the move in the euro. This leaves GBPEUR some 3.2% lower than its early March high. Today, BoE Deputy Governor Ben Broadbent’s speech at 09:10 BST to the National Institute of Economic and Social Research is the stand out economic event.


EURUSD price action has primarily been driven by US rates and Russia-Ukraine headlines as of late. Yesterday, European markets cheered after headlines reported Russia will dramatically reduce military activity around Kyiv. The news led to a substantial turnaround in risk sentiment and allowed EURUSD to reach a fresh one-and-a-half week high. Remarkably, even as market optimism gradually decreased as scepticism of Russia’s pledge to scale back operations crept in, EURUSD continued to trade around recent highs. This is due to the reversal in US front-end yields, which occurred after Fed’s Raphael Bostic stated that if the Fed moves too aggressively, it could hurt the economy. For today, markets will keep a close eye on German CPI figures at 13:00 BST. Both the MoM and YoY figures are set to rise significantly further, with the monthly print expected at 1.6% vs 0.9% previously while the YoY print is seen at 6.2% vs 5.1% in February. Markets likely won’t care about a high headline print, as this is imminent due to the higher energy prices since the war in Ukraine, however, if there are signs that this has filtered through further to the core measure, then markets may take this as a precursor for tomorrow’s eurozone CPI print. This could see market pricing around rate hikes from the European Central Bank become more aggressive.


The DXY index fell over 0.6% in yesterday’s session as overall market risk appetite was dealt a boost by positive signs stemming from peace talks in Turkey. The unwind in risk premia in the dollar was most acute against European currencies, which suffered the largest sell-off during the onset of the war. However, with strong US data out of yesterday’s session and still favourable short-term rate differentials in play, due to expectations of faster and more aggressive Fed tightening, dollar downside is likely to be limited. The contained decline in the dollar will be reinforced should headlines from Turkey suggest that momentum towards a peace deal is stalling. In lieu of any peace talk headlines, markets will focus on the US yield curve as it continues to bear flatten. Yesterday, the yield curve inverted briefly when looking at the 2 and 10-year tenors. The inversion of the yield curve at its two most liquid tenors has historically been a recession indicator, however, this time is likely to be different. That is largely due to the fact that the spread in real rates, nominal yields minus inflation, remains positive. That being said, growth concerns over fast and aggressive policy tightening remain, as highlighted in FOMC member Bostic’s speech yesterday. On the data front, jobs openings and quits data for February showed labour demand remains exceptionally strong as per the JOLTS jobs data. Openings slowed slightly but remained strong at 11.3 million in February, well above the consensus of 11.0 million. Today, markets will turn to ADP employment change data which is set to show 450K added jobs in the private sector. The market impact of ADP data is usually more limited than Friday’s BLS Nonfarm Payrolls report, as the Nonfarms also include government employees in their data. Additionally, the ADP survey only counts active employees while the BLS survey considers all employees who are paid, which means ADP data is more sensitive to temporary labour force changes.


Peace talks between Russia and Ukraine were fruitful on Tuesday, a welcome surprise after the last few attempts at dialogue failed to bring the two countries to a ceasefire. Russia said it would “dramatically reduce” military operations near Ukraine’s northern capital of Kyiv, which it has heavily shelled in recent weeks. Although anonymous US and EU officials cited by the Financial Times expressed scepticism about the reported progress, traders took the signal at face value. The price of West Texas Intermediate, the benchmark for US crude oil, fell by about 7 per cent within the hour following the news, briefly breaking below the US$100 per barrel level as supply fears abated. As a result, the shift lower in oil prices dragged down the Canadian dollar, which fell by a third of a per cent over the same time. After the headline induced volatility, the USDCAD pair traded sideways for most of the afternoon session before the Canadian dollar briefly rallied in the evening as US equities took another leg higher on the back of moderating US yields and crude prices continued to recover. Ultimately, USDCAD closed yesterday’s session 0.2% lower on the day. Focus will remain on cross-asset pricing today in the absence of any economic data.

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