News & Analysis

GBP

Sterling continues to benefit from a lower euro this morning after yesterday’s flatter action against the single currency. The pair now trades at its strongest level since July 2016 as sterling continues to prove relatively resilient to market shocks from the Ukrainian war. The current strength in the pound may arise from a more hawkish Bank of England compared to many other DM central banks at the moment, especially as traders increased bets on BoE rate hikes after the most dovish MPC member, Silvana Tenreyro, highlighted upside risks to inflation yesterday. Today’s calendar includes UK Markit construction purchasing managers’ index figures at 09:30 GMT, but this is unlikely to be huge for markets given the focus on Russia-Ukraine and today’s US labour market report.

EUR

The euro hit another fresh low this morning after Russia’s shelling of Europe’s largest nuclear plant led to another bout of risk aversion in markets. The damage at the plant in southeastern Ukraine is unlikely to result in a large kind of devastation: Ukraine stated the fire has not affected essential equipment, and that there had been no change reported in radiation levels. But the headline alone was enough to drive “risk-on” currencies like the euro lower. Outside of Russia-Ukraine developments, euro traders will watch the US labour market report today at 13:30 GMT for further cues while markets will also keep an eye on eurozone retail sales at 10:00.

USD

The overnight session has been dominated by a fire at Ukraine’s largest nuclear power station. European currencies got battered, while the safe haven dollar found renewed strength as initial headlines flagged the danger posed by damaged reactors and suggested that Russian shelling prevents fire brigades from entering the plants. The news led to a broader risk-off move in markets as it raised the prospect of potential radioactive contamination, however subsequent headlines helped to soothe the nerves as Ukrainian officials clarified the fire was isolated to an administrative building. This helped fixed income markets come off their highs, while the move in FX markets stabilised. The highlight of today will be the US labour market report from February. Nonfarm payrolls are expected to have risen by 423k according to the median of forecasts submitted to Bloomberg, with the dispersion of views being quite evenly spread. The high consensus comes after January’s reading was surprisingly strong and didn’t show much Omicron-related slack. Risks are to the upside for market-implied rates, as a downside miss is unlikely to move the 25bps of hikes priced in for March, especially with CPI data still incoming on March 10th, while an upside surprise could begin to see a more aggressive re-pricing over the medium-term, especially as inflation concerns tick up higher by the day.

CAD

While the Canadian dollar led losses against the greenback in yesterday’s session due to broad USD strength, losses in CAD were more contained relative to other G10 currencies following Bank of Canada Governor Tiff Macklem’s economic progress report and continued fresh highs in crude oil prices. Macklem outlined how the Bank sees economic growth as robust and stronger than expected at the last round of projections, reiterating the message from Wednesday’s rate statement. He suggested that one of the main channels through which Russia’s invasion of Ukraine could affect the Canadian economy is by further compounding supply disruptions and delaying shipments. Overall, however, the Bank’s assessment of current economic conditions suggests they are on track to embark on successive 25bps hikes. Nonetheless, the emphasis on the fluid global risk profile and Macklem’s loose language around inflation and policy tightening allows the BoC to keep the door open to either holding or raising 50bps, depending on economic conditions at the time. With January building permits at 13:30 GMT being the only release of note for Canada today, the focus turns to US Nonfarm payrolls also released at 13:30.

 

 

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