News & Analysis


After spending a large portion of yesterday’s session in the green, the pound ultimately closed out the day 0.51% lower against the dollar and 0.37% lower against the euro. GBP underperformance continues to be the narrative again today as FX markets trade with an acute risk-off tone this morning following further distress signals from Chinese assets overnight. Compounding the pressure on the pound is domestic growth concerns, stemming from both increased risk of renewed trade frictions with the EU and rising inflation pressures. This morning, markets were reminded of the UK’s fragile growth backdrop as Q1’s GDP data undershot expectations by 0.2 percentage points to post quarterly growth of just 0.8%. However, that overstates the strength of the UK economy, largely due to positive reopening effects in January. In February and March, the economy printed flat growth and a -0.2% contraction in month-on-month terms. The slow economic momentum comes at a time when the consumer is about to be placed under substantial pressure from rising energy bills after the April Ofgem price cap increase. The calls for further fiscal support are likely going to increase on the back of today’s GDP data, and while the Treasury has ruled this out at present, comments from the Prime Minister suggest further support measures for households could be imminent.


The single currency remains a notable source of stability in a volatile FX market at present. Sitting near multi-year lows, the depressed valuation in EURUSD has meant that the single currency has withstood further pressure from the US dollar at present. Moderating US Treasury yields, due to the widespread risk-off tone in markets, has also been a welcome development for the euro. Further support for the single currency has come from the ECB, who following President Lagarde’s comments yesterday, have practically confirmed an interest rate hike is set to take place at July’s meeting. However, while all of these factors have stemmed a more dramatic fall in EURUSD, they haven’t turned the tide for the single currency, which continues its grind towards fresh lows today. The mounting pressure from growth and interest rate differentials has increased speculation around the most traded currency pair hitting parity, with Europe’s largest asset manager, Amundi, suggesting this could happen within the next six months in an FT article yesterday. Today, little is on the data calendar, and the limited ECB speakers on the agenda are unlikely to influence FX markets given the firm pricing of the ECB’s policy path this year. This means the single currency remains at the mercy of broader market developments, which at present remain unfavourable for EUR bulls.


Increased market volatility persisted in yesterday’s session as traders faced the most impactful data release of the week; April’s US CPI inflation report. After equity markets shifted back and forth on the prospect of retracing prior losses on Tuesday to eventually close flat on the day, US equity futures pointed in the green on Wednesday as markets largely traded with improved risk sentiment. While much of this was due to a stronger performance in Chinese equities and a stabilisation in the Chinese yuan overnight, it was also due to the expectation that US inflation pressures are set to begin moderating. While this was true in the sense that base effects meant inflation peaked in March in year-on-year terms, the same can’t be said for the pace of underlying price growth. At 0.6%, monthly price growth in core inflation outstripped all economist expectations and highlighted a much stronger underlying inflation dynamic in the US economy. Upon the release, the dollar completely retraced all of its losses on the day as US Treasury yields spiked and equity futures gave up gains as the prospect of a larger than 50bp hike from the Fed was back on the table. However, markets quickly whipsawed, especially in the FX space, as traders attempted to buy the dips and fade the post-CPI move. The aggressive price action was most visible in AUDUSD, which in the space of an hour went on a 3% round-trip. The aggressive bounceback in FX pairs against the dollar ultimately proved unsuccessful as the greenback progressively climbed higher throughout the evening session as US equities, again led by the NASDAQ index, posted losses in excess of a percent. This morning, with renewed pressure on Chinese assets overnight as onshore markets adjust to the US CPI reading, US equity futures are back trading in the red. This is coinciding with a reduction in US Treasury yields, suggesting another risk-off tone awaits traders today. This is visible within the FX space too as JPY finds a renewed risk-off bid to trade with CHF as the only two currencies sitting stronger than the dollar in the G10 space.


The Canadian dollar was one of the only currencies to close out yesterday’s session higher against the dollar following a concerning US CPI release. However, with risk conditions deteriorating yet again overnight, and volatility remaining high in global markets, the loonie has given back all of yesterday’s gains this morning in the European session. US equity performance is likely to be the dominating factor for the Canadian dollar today after the recent sharp drawdown has coincided with CAD weakness. Also on the agenda for today is a speech by Deputy Governor Toni Gravelle, who is set to discuss “commodity price shocks and the impact on growth and inflation in Canada”. The commentary by Gravelle is timely for FX markets as many have pointed toward the reduced support a higher oil price is offering CAD at present. While Governor Macklem eluded to CAD’s reduced oil beta at the Q&A at April’s meeting, Gravelle is likely to expand on the Governor’s argument for economists today at 11:50 ET.



This information has been prepared by Monex Europe Limited, an execution-only service provider. The material is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is, or should be considered to be, financial, investment or other advice on which reliance should be placed. No representation or warranty is given as to the accuracy or completeness of this information. No opinion given in the material constitutes a recommendation by Monex Europe Limited or the author that any particular transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research, it is not subject to any prohibition on dealing ahead of the dissemination of investment research and as such is considered to be a marketing communication.