News & Analysis


After a broad bounce back in risk sentiment spurred the pound on during Friday’s session, normal service resumed on Monday. Despite the closure in UK markets for a Bank Holiday, the pound continued to trade on international exchanges, with GBPUSD slumping on renewed pressure stemming from European equity exchanges. A flash crash in Swedish stocks yesterday, induced by human error from a Citi trader, induced volatility across European assets and spurred the dollar on again via haven flows. The result was a 0.59% slip in GBPUSD, meaning the currency pair lost around two-thirds of Friday’s rally. This week, the focus for GBP traders will be firmly on the Bank of England’s latest policy decision on Thursday. With the Federal Reserve set to announce their latest interest rate decision the evening prior, the stark contrast in policy will be telling for markets. Today, only the final reading of April’s manufacturing PMI is due out at 09:30 BST and comes as the pound returns to trading on the front foot as it seeks to reclaim Friday’s high.


The euro continues to underperform in the G10 space as the ongoing war in Ukraine and deteriorating relations between Brussels and Moscow weighs on sentiment. Meanwhile, European equities are visibly showing the pain from the deteriorating growth outlook, further emboldening the EUR bears. Yesterday, the divergence in European and US equity performance drove a 0.44% drop in the single currency. Although European equity performance can be partly explained by the flash crash in Swedish equities via contagion effects, there are few signs that this pricing is going to be reversed this morning. Instead, EUR traders will keep a firm eye on how the broad dollar trades during the week where the Fed is due to turn substantially more hawkish along with geopolitical developments. Over the weekend, Germany called for a phased-in ban on Russia oil imports to the EU as it looks to reduce its exposure before the blanket ban. The move by Berlin has increased the probability of an EU ban on Russian oil in the coming months, leaving the union exposed to just a handful of Russian natural resource exports.


Despite a bounce in broad risk sentiment on Friday, which weighed on the dollar at month-end, the greenback returns to trading on the offensive this week as markets position for a more hawkish Federal Reserve meeting on Wednesday. During yesterday’s trading session, the dollar climbed on equity divergence as US indices outperformed European benchmarks. Meanwhile, the US 10-year climbed above 3% for the first time since 2018, further boosting the dollar, despite April’s ISM data undercutting expectations. Within the ISM data, employment, new orders, and production sub-indices all weakened, with the downturn in production and employment largely due to supply issues. Today, data on March’s factory orders is expected at 15:00 BST along with March’s JOLTS job openings, but we don’t believe either will be large drivers of the broad dollar’s performance. Instead, positioning ahead of Wednesday’s Fed meeting is likely to dominate. While markets have settled on pricing a 50bp hike at the meeting, the focus has shifted to the Fed’s ultimate endpoint– the terminal rate. A reassessment of the terminal rate will be driven by the Fed’s forward guidance and will likely give the dollar further legs.


Expectations of a 75bp rate hike in June have increased yet again despite Bank of Canada Governor Tiff Macklem’s pushback last Monday that “anything bigger than 50 basis points would be very unusual.” The repricing comes after a Globe & Mail weekend interview with David Dodge, the former BoC governor. The ex-top central banker said the Bank should hike rates by “50 or even 75 points” on June 1, “followed by another 50 or so” at the following meeting on July 13. Money markets now price a 20% chance of a 75 basis point hike on June 1, which we think is stretched. Nevertheless, the loonie has seemingly shrugged off money market pricing as it fell shy of half a percent on Monday, making it a middling performer among its G10 peers. Every G10 currency fell against the US dollar, however, as risk-off sentiment sparked a rush for the greenback’s safety. Equities fell throughout most of the day, and their last-minute rally didn’t do much to move FX. Canada’s 10Y bond yield rose 8bps, outpacing the 5bp gain in its US counterpart. Meanwhile, crude oil pulled a similar move to US equities, closing half a percent in the green despite trading red most of the day. Today at 17:30, BoC Senior Deputy Governor Carolyn Rogers will give a speech justifying why the Bank of Canada is operationally independent from the political process. This is a speech the Bank would prefer not to give. It feels forced to respond to current Conservative leadership candidate Pierre Poilievre, who has repeatedly attacked the central bank’s policies.

FX Elsewhere

Overnight, the Reserve Bank of Australia hiked its Cash Rate by 25 basis points, a move that exceeded expectations by 10bps. The decision by the RBA took the Cash Rate to 0.35%, which shocked all economist estimations due to the unconventional level the policy rate now sits at. In addition to the 25bp hike, the RBA stated that it would cease reinvesting in maturing bond holdings, effectively starting the quantitative tightening process. Overall, the shift in the monetary policy framework by the RBA emboldened expectations of sustained hiking, as seen by the 16.5bp rise in three-year government bond. This has given the Aussie dollar a boost overnight, with the currency now trading o.7% higher on the day.



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