News & analysis


Sterling replicated Monday’s move yesterday by climbing 0.36% higher on the day against the dollar, although this time round the pound sustained losses against the euro. Unlike Monday where the GBP rally was driven by increased optimism around the UK economic recovery due to the next phase of easing taking place, yesterday’s sterling rally was driven by broad USD price action which lifted the G10 currency board as a whole. Speaking to the House of Lords Economic Affairs Committee yesterday, Bank of England Governor Andrew Bailey stated that he was watching incoming inflation data “extremely carefully” for evidence of a persistent overshoot, however, such a threat to the BoE’s 2% target wasn’t evident in today’s inflation data. CPI for April came in bang on expectations at 1.5% this morning, up from 0.7% in March. The rise was largely due to high utility bills and higher oil prices, evidenced by the less dramatic rise in core CPI from 1.1% to 1.3%. The inflation reading sits in stark comparison to the US reading last week that caused a substantial bout of volatility as transitory factors resulted in a 4.2% headline print. With inflation not prompting any speculation over BoE policy, this morning’s data has done little to stoke the pound into life as it sits flat against the dollar and slightly lower against the euro.


The euro ripped over 0.6% higher against the US dollar in yesterday’s trading session to reach highs not seen since late February, as a risk on market mood ignited by news of further reopening globally dominated sentiment while domestic headlines remained sparse. The eurozone published a revision of Q1 GDP data which matched the previous print at -0.6% QoQ and -1.8% YoY as virus containment measures were extended into the first quarter and further tightened in many nations, weighing on output. Going forward, as vaccinations continue to pick up pace and lockdown measures are further eased without an uptick in virus case counts, Q2 GDP figures should reflect a partial recovery. Today’s data includes eurozone CPI inflation figures from April at 10:00 BST. Markets will choose to overlook the data as the higher energy prices and base effects have likely clouded the release, making it difficult to distinguish signal from noise. CPI inflation data from the US has been more on investors’ radars over the past weeks as the fast vaccination programme, economic reopening and massive fiscal stimulus in the pushed up inflation expectations along with the low base from last year, while for the eurozone, only the low base effects and higher commodity prices applied in April 2021 as most of the eurozone was locked down still. For the euro, this means that today’s reading may fail to excite markets and euro traders will continue to focus on broader developments in the improved risk environment from which the procyclical euro benefits from.


The DXY index has been on a losing streak since Friday, however, yesterday marked the largest run of USD weakness. There was no major headline that prompted the overall decline in the dollar, but smaller developments amalgamated to paint a more constructive global economic backdrop, which spilt over into commodity markets as demand pressures continued to pave the way to higher input prices. This allowed commodity currencies to lead gains against the dollar in yesterday’s session, but with crude oil prices paring gains over the course of the session, petro-linked currencies had to hand in their gains. GBPUSD is trading just below yesterday’s highs this morning while EURUSD has broken through to fresh highs as the dollar trades mixed in today’s morning session. With the economic data calendar being light today, all focus turns to the FOMC meeting minutes which are released at 19:00 BST. US Federal Reserve officials reaffirmed time after time their commitment to maintaining their loose monetary policy stance despite surging inflationary pressures and managed to keep interest rate expectations anchored over their rate path horizon with real yields opting out of the rally seen in nominal yields. Today’s meeting minutes are unlikely to provide markets with much news as the Fed’s communication has been crystal clear regarding stimulus and the last meeting failed to provide any fireworks. Markets are much more interested in the June 16 meeting as they expect this meeting to reveal more of the Fed’s stimulus timeline. For the remainder of the day, the US dollar is at the mercy of any changes in risk sentiment and commodity prices.


The Canadian dollar welcomed the latest wave of broad US dollar weakness yesterday as it carved out fresh six-year highs in the morning of the European session, however, with WTI falling 4.3% over the course of the session, the loonie failed to hold onto its gains over the course of the day. Ultimately, USDCAD closed 0.02% higher after sitting 0.44% lower at one point in the day. Oil headed for a back-to-back loss in yesterday’s session after the API crude inventory data showed US stockpiles increase while traders tried to price the tentative talks between world powers over the revival of the Iran nuclear deal. The American Petroleum Institute reported that domestic stockpiles increased by 620,000 barrels last week, while gasoline and distillate inventories dropped. If this level of inventory build were to map over into today’s Department of Energy release, which is seen as the more reliable indicator of crude inventories, the build in oil supplies would be the highest since mid-March. The decline in oil prices will be a welcome sign for the Federal Reserve, who continue to look at rising energy and industrial commodity prices as a source of inflation, but for the loonie, it starts to weigh on what had become a very constructive commodity backdrop to the economic recovery. The drop in crude was largely due to initial comments by a Russian envoy that significant progress had been made between Iran and the US over the revival of the 2015 nuclear agreement, which could if resumed lead to Iran exporting oil back into global markets without US impediments. The news of increased supply, at a time when inventories were back on the rise, led to the downturn in WTI. Following comments by a Russian diplomat sought to downplay the initial optimism caused by the envoy, leading to a stabilisation in crude markets. Today, the loonie trades broadly flat against the US dollar as traders await April’s CPI release at 13:30 BST, with headline inflation expected to jump from 2.2% to 3.1%, although the inflation overshoot is expected to be caused by transitory factors similar to that in the US.



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