News & Analysis


The pound tumbled to November 2020 lows against the US dollar on Friday amid a continued rise in US Treasury yields, and is hovering just above those levels this morning after a soft set of UK data from February. Monthly GDP and industrial production figures both printed to the downside of expectations, with GDP sitting at 0.1% MoM while industrial production fell by 0.6%, all the while US yields continue to pressure the currency pair. Looking ahead to today’s session, there isn’t much on the agenda to shake things up for the pound, which means that rate markets will be in focus for the pound today ahead of tomorrow’s US CPI data and Wednesday’s UK CPI data.


After being under pressure of rising US rates for a number of trading sessions, EURUSD briefly spiked to a fresh high overnight on the French elections news before surrendering most of its gains later in the Asian session. Exit polls showed after the initial balloting that Emmanual Macron will face Marine Le Pen in the final round of the French election on April 24, just like in 2017. Two runoff polls foresaw Macron will prevail with between 52 and 54.5% of the votes. This should keep EURUSD volatility elevated in today’s session, before markets turn to bigger fish to fry in the days ahead: the European Central Bank will announce its policy decision on Thursday, and although no policy action is expected, the meeting will be essential to markets in order for them to assess the ECB’s latest views on the growth shock from Russia-Ukraine and the inflation outlook. This week will be a holiday-shortened week in Europe, with the Easter break coming in at the end of the week.


The greenback continues on a high this morning after the DXY, which is a gauge of dollar strength, traded above the 100-mark for some time on Friday – levels last seen in May 2020 at the peak of pandemic panic. The dollar is primarily being propped up by rising US Treasury yields. Rising yields are the effect of rising inflation expectations, or rising expectations of policy normalisation. In the case of last week, comments from Fed member Lael Brainard and the following release of the FOMC meeting minutes from March confirmed the Fed will shrink its balance sheet at a higher pace than in the previous quantitative tightening (QT) cycle. As inflation is racing ahead and the labour market is tight, the Fed wants to cool the economy quickly by tightening policy. The Fed’s mortgage bonds have long tenors, so expectations of more aggressive QT have primarily seen the back-end of the US Treasury curve rise. This has caused China’s yield advantage over the 10-year Treasuries disappear for the first time in  more than a decade, paving the way for more capital outflows from China. Looking ahead to this week, markets may continue to push yields higher in the runup to US CPI on Tuesday, with the median of forecasts submitted to Bloomberg foreseeing an 8.4% YoY increase in CPI in March.


The Canadian dollar strengthened two tenths of a percent against the US dollar on Friday in a mixed session. The pair briefly spiked to fresh highs before retracing after a conflicting Canada jobs report showed employment rise by 72.5k, nearly as much as the 79.9k predicted, while the unemployment rate hit a record low of 5.3%. That’s far weaker than the 336.6k in February, but above the historical average of nearly 20k per month. The weakness in CAD unwound as traders digesting the data grew sceptical that a reasonably strong jobs report would throw the BoC off track from its widely expected 50bp move at the next meeting. Expectations for the April 13 meeting have grown to their most hawkish levels yet with overnight swaps markets now pricing in 62.5 basis points of tightening, far more than the Bank’s typical sizing of 25bps. This morning, the commodity-tied loonie came under pressure amid weaker crude oil prices, as China’s ongoing Covid outbreak keeps concerns around energy demand elevated, but the Bank of Canada’s upcoming meeting on Wednesday may help prop up the loonie. With market expectations being fairly aggressive, however, there is a chance the BoC may underdeliver.



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