The pound drifted higher against the dollar yesterday as risk currencies broadly rallied, but sterling failed to keep pace with the euro after the single currency was backed by more hawkish ECB commentary. In the monetary policy space in the UK, Bank of England Governor Andrew Bailey hit the wires yesterday. Speaking at a conference on the “return of inflation” at the Austrian National Bank in Vienna, Bailey stated that the BoE would hike again if the medium-term inflation outlook warranted it, but caveated this by saying that the Bank is taking the cost of living crisis into account when setting policy. However, unlike the ECB’s comments, Bailey’s statements failed to impact market pricing. This morning, the pound is trading flat against the dollar amid a mixed risk environment, however, this is unlikely to remain the case as flash PMIs for May are released at 09:30 BST. Specifically, the services PMI will be in scope as market participants try to gauge the impact of rising inflation on household consumption.
After lagging the broad G10 move in the early parts of yesterday’s season, the euro quickly extended its gains against a broadly weaker dollar after a blog post by ECB President Christine Lagarde was published. Within the blog post, Lagarde stated that interest rates were likely to exit negative territory by September, thus indicating the central scenario for policy going forward is two consecutive 25bps hikes from July’s meeting. However, despite the more hawkish near-term comments, Lagarde caveated the longer-term rate profile heavily, stating that the ECB wasn’t on a pre-set policy path given current economic conditions and that monetary policy needed to exhibit gradualism, optionality and flexibility. Despite this, money markets still priced in more hikes by the ECB this year, with the implied policy rate at year-end rising to a cumulative 100bps of hikes. The increased probability of a more hawkish ECB also lifted front-end euro-area yields, which extended the euro’s rally in turn. Compounding the supportive euro backdrop in yesterday’s session was the release of May’s IFO expectations index from Germany, which rose from 86.7 to 86.9. This morning, the single currency continues to grind out gains, largely due to repeated hawkish commentary from ECB President Lagarde as opposed to the incoming PMI data. While Lagarde merely reaffirmed yesterday’s message when speaking on Bloomberg TV, the rally in the euro highlights how dip buyers are more than happy to oblige to the ECB’s near-term objective of a stronger euro. During the recent surge in EURUSD, French PMIs printed to the downside, with the manufacturing index falling from 55.7 to 54.5 and the services measure also slipping from 58.9 to 58.4. From Germany, the manufacturing PMI stabilised at 54.7, while services activity came under pressure as it fell from 57.6 to 56.3. The eurozone wide reading is soon released at 09:00 BST.
The dollar was broadly weaker against the G10 space yesterday as a rally in the Chinese yuan, driven by the possibility of reduced trade barriers with the US, boosted market risk sentiment. This dynamic overpowered geopolitical concerns, of which were inflated by President Biden stating that the US would militarily intervene if China invaded Taiwan. Although White House officials attempted to walk back Biden’s comments throughout the day, the President seemingly ended the long held policy of strategic ambiguity with yesterday’s comments, despite his assurances that it is still intact. Further exacerbating the dollar’s downside was commentary by Atlanta Fed President Raphael Bostic, who stated that the Fed could meet market expectations over the next few meetings before pausing the hiking cycle at September. For now, Bostic’s comments seemed to not represent the prevailing consensus among the FOMC, but markets will be questioning whether they have priced in too much tightening from the Fed. This morning, the dollar trades mixed against G10 currencies ahead of May’s preliminary PMI data at 14:45 BST. This comes even though European equities continue to trade in the red along with North American futures, which are driven lower by the NASDAQ futures after Snap shares fell 31% postmarket.
The Canadian dollar rallied 0.6% against its US counterpart in yesterday’s session as market risk conditions stabilised and commodity currencies received a boost from an improvement in China’s macroeconomic outlook. Under these conditions, the loonie has seemingly shed the risk discount that was priced in by markets over previous weeks. However, this morning, the loonie’s 0.15% drop against the dollar highlights just how tentative directional price action in high beta currencies is amid the fluid macro backdrop.