News & Analysis


While the cross-asset space breathed a collective sigh of relief yesterday on the fact that the weekend didn’t bring another flare up in hostilities in the Middle East, the readthrough in FX markets wasn’t as clear. While both NZD and AUD led gains on the relief rally having underperformed on Friday due to  risk-off conditions, GBP, which was also a laggard on Friday, continued to sink lower on Monday (see GBP). Moreover, high beta currencies like ZAR and MXN also failed to benefit yesterday despite notching sizable losses on Friday. This was befitting with our view that there is a high bar to sell the dollar now, even as yields stay below psychological levels and global equities rally. If anything, the level of the bar was notched incrementally higher overnight by the PBoC’s CNY fixing, which at 7.1059 is now 80 pips higher than it was on April 15th. This has facilitated a continued drift higher in both onshore and offshore yuan, which is having a partial knock-on effect in the region this morning.

For today, US flash PMIs for April are set to be released at 14:45 BST. While another strong reading is expected, we doubt this will be enough for US yields to break higher and the dollar to make further gains. Instead, we suspect the dollar bull’s will have to wait until later in the week when Q1 GDP and March’s PCE report are released to realise further gains.


Monday offered an interesting start to the week for sterling traders, with markets continuing to digest comments from the BoE’s Ramsden late on Friday. Significantly, Ramsden suggested that inflation risks are more balanced relative to February’s MPR. This is particularly notable given his recent track record as a hawkish dissenter on the MPC, leading markets to further accelerate BoE easing bets through yesterday’s trading. Not only did this leave market pricing of a June cut at 64%, up from 27% prior to Governor Bailey’s comments last week, but the move in BoE expectations also saw Gilts rally with the 2Y yield dropping 6.2bps on the day and the FTSE 100 close at a record high, rising 1.6%. In terms of the impact in FX markets, this left GBPEUR to record a two-sigma move when measured over a two day range. In fact, this was the largest 2-day jolt since July 19th 2023, when inflation data for June fell from 8.7% YoY to 7.9% against expectations for a print of 8.2%, ushering in a change in stance from the BoE. That said, we would also note that Ramsden has a history as a dovish dissenter on the MPC too. Given this, we are waiting for speeches by rate setters Jonthan Haskel and Chief Economist Huw Pill, who are both set to speak later today, before jumping to any conclusions. If both steer dovish, this would clearly favour a June rate cut, despite the recent relative strength of UK wage and inflation data. A more hawkish interpretation of events however should keep an August start to easing as the base case in our view, an outcome that should see some of yesterday’s price action unwind, offering a modest boost for sterling in the process. We are inclined to view the second outcome as more likely at this juncture, not least given the professed data dependence of MPC members. This leaves GBPEUR scanning as cheap in our view, offering an attractive entry point for longs with a target of returning back to the top of this year’s range on persistent inflation and a BoE that should disappoint current market rate cut expectations.


The single currency remained pinned to the middle of its recent range yesterday, even as risk conditions generally improved in markets. With markets instead fixated on the potential divergence in monetary policy stances from the Fed and the ECB, the euro bears weren’t necessarily deterred by the brief reprieve in markets. Instead, positioning ahead of today’s PMI reports likely played a more dominant factor, especially as speeches by both President Lagarde and Banque de France Governor Villeroy avoided commenting on the rate path. The same can’t be said for ECB Vice President de Guindos this morning, however. Speaking in Le Monde, de Guindos stated that a June cut is a done deal barring any surprises in the data or inflation conditions, but stressed that the ECB does internalise what the Fed does with monetary policy when it calibrates its own stance. Although stating the obvious, these comments contrast with those from other ECB policymakers that have generally stressed the central bank’s independence. If this is a route the ECB wishes to continue down, this could potentially provide the euro with some short-term relief. Whether that occurs or not, however, will depend on the data. As mentioned, April’s flash PMIs are set to be released today and are the biggest data point this week for the euro. These indicators have shown a steady improvement in growth conditions in the euro area in Q1, driven by services activity in smaller eurozone economies, but in our view have underwhelmed the significant improvement in confidence indicators over the past six months. Whether the eurozone activity finally catches up with the leading indicators  or continues to present a sluggish recovery will be key for EURUSD’s defence of the 1.06 handle. So too will be firms’ reports of inflation and hiring conditions. Although here, we think the euro bulls with find less support as business executives have consistently reported lower hiring intentions and an inability to pass on higher input costs to the final consumer. For this reason, we maintain our bearish EURUSD view, but note if expectations are matched on the aggregate figures, EURUSD is unlikely to break its current range to the downside.


Monday trading saw USDCAD slide 0.35% lower to start the week, reflecting a turnaround in US equities following their recent slide on the back of higher for longer Fed expectations. This also marked an extension of last week’s loonie outperformance, with CAD trailing only Antipodean FX for returns against the dollar. As we noted in yesterday’s morning report, however, we think this likely represents defensive positioning by markets, with the Canadian economy relatively well isolated from the geopolitical risks emanating from the Middle East at present, and a partial unwind of CAD shorts as a result. While in the short term cross currents could continue to offer some support for the loonie, we continue to be structurally bearish on CAD, even in spite of recent price action. Specifically, weak domestic fundamentals relative to the US and an unwind in defensive positioning should both weigh on the loonie, an outcome that we expect to take USDCAD back into the 1.38-1.40 range in coming weeks. That said, for today loonie traders are likely to be looking at external events once again for direction given a blank domestic data calendar.



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