News & Analysis

GBP

The market’s reluctance for GBPEUR to break higher meant sterling continued to be dragged lower by a weaker euro in yesterday’s session. However, unlike Tuesday, domestic drivers also played a role in GBP price action yesterday. Speaking in front of the Treasury Committee in Parliament, newly appointed MPC member Swati Dhingra struck a more cautious tone than her predecessor, Michael Saunders. Dhingra’s commentary around a more cautious approach to policy amid an obvious slowdown in economic growth suggests that the split in the MPC following Saunders’ exit in August would likely become more dovish, with the risk that Dhingra could even join the likes of Jon Cunliffe in voting to hold rates as soon as September’s meeting. Coupled with commentary by Governor Bailey at Sintra, which revolved around the need to bring inflation down despite the UK economy already showing obvious signs of a slowdown, headlines from the Treasury Committee meeting weighed on both pricing for the next BoE meeting and the pound. This morning, however, the pound is bid against the dollar, likely due to depressed valuation, as data this morning continues to highlight the weakening economic backdrop. The Lloyds business barometer for June fell 10 points to 28%, the lowest level since last year’s lockdown, while firms also reported slower hiring intentions.

EUR

The single currency stood out among the G10 pack yesterday as its bias lower continued to be displayed throughout the day. A slip in regional German CPI reports set the tone early in the European session, as a mixture of frozen transportation costs and fuel tax cuts saw headline inflation figures fall over the month of June. However, the inflation data out of Spain, which is regarded as a better indicator of underlying inflation pressures in the eurozone relative to the German figures, saw price growth ramp up over the course of the last month. The headline inflation figure jumped 1.5 percentage points to 10.2% YoY in June, and lifted Bund yields and the euro in response. Despite the stronger inflation data out of Spain, the level of support for EURUSD wasn’t to last as a further downgrade in US GDP sparked further recession pricing in markets. Meanwhile, comments from ECB President Christine Lagarde in yesterday’s policy panel failed to stimulate bets that the central bank would hike more than 25bps at the July meeting, despite the stronger inflation data out of Spain. Sitting on a panel with Fed Chair Powell and BoE Governor Bailey, Lagarde stressed that the consolidated eurozone inflation data on Friday would be more important for the next policy decision given the offsetting inflation data that day. Ahead of the July 1st eurozone-wide inflation report, markets received further colour on the inflation backdrop as France’s preliminary CPI this morning. Following a second consecutive 0.7% MoM gain, headline CPI rose to 5.8% in France under the first reading.

USD

The US dollar notched moderate gains against all G10 currencies in yesterday’s session as growth fears continued to dictate price action in bond markets. Not only did Treasury yields drop, but the curve continued to remain historically flat with just 6 basis points between the yield on the 2-year and 10-year securities. Growth concerns were the main driver as they continued to resonate in markets despite further optimistic commentary by Fed Chair Powell. Speaking at the ECB’s Forum in Sintra, Powell reiterated his belief that the Fed could orchestrate a relatively soft landing for the US economy, but highr interest rates were required to bring demand down quickly. Despite his firm belief that the US economy would avoid a recession, markets focused on Powell’s “whatever it takes” attitude on tackling inflation, especially as he highlighted the Fed’s priority to fight inflation supercedes avoiding a recession. Despite Treasury yields continuing to plummet overnight and equity futures pointing to another painful session at the cash open, the dollar starts this morning on a mixed footing. With little data set to be released beyond US PCE for May at 13:30 BST, which in itself is likely to have a limited impact given the inflation signal was already relayed by the earlier CPI report, the dollar is likely to take its cues from the cross-asset backdrop. Traders will also concentrate on flow as month-end rebalancing begins.

CAD

Yesterday was a bit of a boring one for the Canadian dollar as it fell 0.14% on the day, making it the second-best performing currency against USD in the G10 after equity markets struck a risk-off tone. That’s largely because the yield differential between US and Canadian sovereign debt turned a bit more favourable for Canada, as Canadian yields fell by 0.2 to 3.2bps on the day while US yields fell by a more decisive 7.1 to 8.2bps across the curve. Oil prices were down sharply, with WTI falling by $2 to 109.78, but given that the correlation between CAD and oil has weakened in recent years—particularly after the Covid-19 pandemic began—the downward move in oil was insufficient to cause a downturn in CAD of the same magnitude as the drops in other G10 currencies. On today’s calendar, Canadian monthly GDP for April is scheduled for release, with economists calling for a 0.3% monthly rise that should pull the year-on-year growth rate up to 4.9%. Nevertheless, given the lagged release of the data relative to its survey period, the report is unlikely to cause a large reaction in CAD.

FX Elsewhere: Riksbank to go 50bp

Markets will tune into the Riksbank’s next policy decision at 08:30 BST as the Swedish central bank is widely expected to join the G10 crowd and hike rates by 50bp. The consensus around a larger 50bp hike has formed not only due to the growing popularity of larger hikes among G10 central banks, but also the stronger than expected inflation data coming out of Sweden. Given expectations are firm for a 50bp hike, the impact of the Riksbank’s decision on markets will likely stem from their repo rate projections. Given the inflation backdrop, the Swedish central bank could signal two further consecutive 50bp hikes, bringing the poliy rate to 1.75%. Previously, the Riksbank didn’t project the policy rate to hit such levels until the end of its three-year forecast period.

 

 

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