Yesterday’s price action didn’t disappoint, with GBPUSD trading within a 0.6% range although most of the volatility was concentrated to a 10 minute window. The announcement of the Bank of England’s latest policy measures were the cause of this volatility. The initial statement saw inflation projections mildly undershoot the BoE’s 2% target, suggesting current interest rate pricing is on the more aggressive side, while there were no hints of policy being altered. This pushed the pound down towards session lows, only for an aggressive rebound once a separate market notice outlining the tapering of the BoE QE purchases was announced. Sterling quickly shot up to touch session highs on this news as the BoE reduced the pace of purchases from £4.4bn a week to £3.4bn in the period of May 10 – August 2nd. However, any hawkish signalling this may have provided for financial markets was soon dampened by MPC members, including Governor Andrew Bailey, once the press conference began. Policymakers were quick to reinforce the message that the stock of asset purchases was key for the BoE instead of the flow, given that the BoE has a fixed envelope of assets to buy as opposed to the open-ended QE programmes used by North American central banks. This means the decision to taper doesn’t have the far-reaching implications of future monetary policy decisions. The reiteration of this pushed sterling lower, with the pound ultimately closing the day out 0.13% lower on the day. Losses have been reversed this morning, however, with the news that the Conservative party has won the by-election in Hartlepool with a majority of 51.9% vs Labour’s 28.7%. The 23% increase in the Conservative vote share is the largest increase in support for any sitting government in a by-election since the end of the Second World War. Other regional by-elections and electoral results are expected to be announced this evening and tomorrow. With little in the interim, expect sterling to float around based on broad USD moves, especially with US jobs data due out this afternoon.
The euro has recovered well from Wednesday’s dip against the US dollar where it dropped below key psychological support levels briefly, as yesterday’s session saw the pair rip over half a percentage point higher amid broader dollar weakness. German factory orders climbed 3% in March, this morning’s data dock showed, which is twice the forecasted pace. Consumer goods and domestic demand were particularly strong, which bodes well for the eurozone recovery as it shows the country’s manufacturing sector remained strong in the face of the extended lockdown. As the outlook continues to improve, markets are trying to gauge how and when the European Central Bank will reduce purchases through its Pandemic Emergency Purchase Programme (PEPP). Until this morning, the central bank had stayed away from commenting on its bond-buying pace beyond this quarter, but Governing Council Member Martins Kazaks, who also heads Latvia’s central bank, stated this morning the ECB could decide to scale back PEPP purchases as early as next month if the euro area economy does not deteriorate. Kazaks added that while nominal bond yields have edged higher in recent weeks, those adjusted for inflation have stayed low since the ECB’s decision to ramp up its bond-buying pace in March. The euro enjoyed a modest boost upon his comments, but this is not likely to dominate today’s trading session as the reaction was only mild. Instead, markets will focus on the Non-farm payrolls from the US this afternoon which should set the tone for risk sentiment.
The dollar traded in the red against the majority of the G10 yesterday after comments from several Federal Reserve Officials pointed at a push-back on QE tapering talk and inflation concerns, but it is unlikely the move was related to the comments. The Federal Reserve has been very clear in its communication that it intends to keep monetary policy loose until substantial improvement is seen across the data, not just the outlook, and Fed officials echoing that message is unlikely to have moved the needle for the greenback – especially as US 10Y yields remained steady. Boston Fed President Eric Rosengren stated yesterday that scaling back asset purchases would be premature and that the temporary factors pushing up inflation this spring won’t last, which is in line with the FOMC’s communication over the past month. Meanwhile, Dallas Fed President Robert Kaplan stated he wants the Fed to start talking about reducing QE “sooner rather than later”, saying the economy has improved faster than he expected but this is no news to markets from the Fed’s hawkish outlier who is not among the voting members. What will be important instead, is how the data prints from here on. Both fixed income and currency markets have brushed off US data prints over the last month as the US outperformance story has been baked in while the Fed successfully anchored policy expectations, but as lockdown measures are eased further and activity picks up, Treasury yields and the dollar will react to data surprises to a higher extent. Today’s Non-farm payrolls at 13:30 BST may be too early to put that to the test, offering room for a mild risk-on move and sell-off in the US dollar if the figures surprise to the upside.
The loonie climbed 0.95% in yesterday’s session to hit levels not seen since September 2017 as the dollar broadly declined and the commodity supercycle continued. The Bloomberg commodity index, a broad measure of global commodity prices, hit its highest level since 2015 with lumber and copper prices carving fresh all time highs. This helped not only the loonie, but other commodity-linked and high beta currencies like NOK and SEK. The loonie is sustaining losses this morning as it retreats from multi-year highs as traders await labour market data from April at 13:30 BST. Net employment is expected to have fallen by 150,000 last month as tighter lockdown measures were implemented in response to rising cases. While job losses are largely expected and have arguably been priced into the loonie back in April when lockdown measures were rolled out, any significant unwind in recent labour market gains is likely to prompt a substantial retracement in the loonie. This will be especially the case should US labour market data surprise to the upside, with 1m job gains expected ahead of the release. The details of where jobs have been lost are crucial too as it will help markets to gauge how quickly the recent unwind will be reversed once lockdown measures are eased. Canada’s labour market had broadly recovered to pre-pandemic levels with the exception of food and accommodation services.