News & Analysis


Yesterday’s inflation report exposed some holes in the Bank of England’s argument that inflation pressures were broadening and there is an elevated risk of self-sustaining domestic inflation. As mentioned in yesterday’s report, the market reaction largely focused on the moderation in core CPI, but the details of the report also suggested a much more tamed domestic demand-driven inflation backdrop. Throughout the day, futures traders in the SONIA market began to price in lower rates from the Bank of England, while Gilt yields dropped substantially. Relative to the 12bp decline in 2Y Treasuries, the 18bp decline in 2Y Gilt yields stood out. This morning, even as yields retrace yesterday’s move across European sovereigns and the US, UK Gilt yields continue to moderate. The vulnerability of market pricing for the Bank of England’s rate path are becoming starkly apparent. The dovish repricing in UK rates continues to weigh on the pound this morning, with GBPUSD down 0.22% at the time of writing. Sterling’s underperformance this morning comes ahead of June’s preliminary PMIs, which are due for release at 09:30 BST. The services PMI will be closely monitored as last month’s preliminary print saw the fourth largest one-month decline on record before being revised higher in the final reading. Within the services PMI, employment and firms ability to pass cost increases through to the consumer will be closely monitored. In politics, by-elections in Wakefield, West Yorkshire, and Tiverton and Honiton in Devon will likely see the Conservative party lose their seats as constituents voice their disapproval of the government’s handling of the cost-of-living crisis and the partygate scandal.


The single currency started this morning’s session on the offensive following a strong performance yesterday. However, a miss in the French preliminary services PMI soon turned the tide for EURUSD, which now sits almost a third of a percent lower on the day. The signs of declining services activity doesn’t bode well for the eurozone economy as it highlights late reopening tailwinds are starting to moderate and the pressure from higher inflation is starting to bite. Should Germany’s manufacturing figures continue to be mired by higher input costs and supply chain issues, it may follow in the French PMIs footsteps and fall below the 54.0 level that is expected. This would only amplify the pressure on EURUSD and eurozone rates as the growth outlook starts to show the first serious cracks. Germany’s preliminary PMIs are due out at 08:30 BST, shortly before the eurozone composite figures at 09:00 BST.


Recession fears dominated market price action yesterday and resulted in a broadly stronger dollar against the G10 currency board in the morning of the European session, with the exception of haven currencies CHF and JPY. However, as North American markets started to come online, the tide began to change for the greenback. Although equities opened around 1-1.5% lower, as indicated by futures that morning, they posted a comeback in the first hour of trading. With North American benchmarks drifting into the green on the day, the dollar started to lose momentum, notably against GBP and EUR. Against commodity currencies, however, the dollar remained superior as the decline in oil and other resources persisted. Most of the cues for broader market price action came from US rates markets. Although Treasury yields remained around 12-14bps lower throughout most of yesterday’s session, pricing of the Fed’s terminal rate began to moderate and also move forward in time. For example, the 1-year forward 2-year Treasury yield fell from 3.87% prior to last week’s Fed meeting to trade just north of 3.4% yesterday. Meanwhile, in swap markets, terminal rate pricing for a 3M swap both fell and was brought forward from 4.13% in April 2023 to  3.87% in January 2023. The reflection of recession concerns in US rates isn’t unjustified. Not only did last week’s Fed projections signal a much weaker growth outlook going forward, but Powell himself even stated that the path for a soft landing was narrowing. Additionally, the Fed Chair’s language around the likelihood of a monetary policy induced recession firmed yesterday. Speaking in front of the Senate Banking Committee yesterday, Powell stated that it is “certainly possible” that tighter monetary policy could tip the US economy into recession. Current models suggest a roughly 30% chance of a recession in the coming 12-months, however, some sell-side analysts including Citibank suggest this is now higher at 50%. This morning, the dollar trades mixed across the G10 ahead of the preliminary June PMIs released at 14:45 BST and Powell’s re-run of yesterday’s testimony in front of the House Financial Services Committee at 15:00 BST.


The Canadian dollar weakened by over half a percent against the US dollar in the early hours of yesterday’s session.. Much of this weakness was driven by poor risk sentiment, as global equities fell across all but one of the 18 major geographic equity markets we track, with the TSX down 1.3%. Energy prices were also a headwind for the loonie, considering US crude oil fell 4.7% to $104. Nevertheless, the sell-off in CAD partially reversed following the release of Canada’s CPI print for May, which blew past expectations, stretching higher to 7.7% YoY. The upside CPI surprise was striking considering most economists did, in fact, expect a big jump in inflation. That print, combined with Carolyn Rogers’ comments at a Globe & Mail conference that reinforced the Bank of Canada’s commitment to tackle inflation, saw the loonie catch a bid. USDCAD ultimately closed the day out just 0.2% higher. The loonie’s bid was supported by the moves in bond markets: although bonds rallied worldwide, pushing yields lower, US yields fell more (down 11 to 14bps) than Canadian yields (down 8 to 10 bps), which provided fundamental support for the CAD retracement. Today’s economic calendar is empty on the Canadian side.



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