With US bond markets coming online after being closed for Veterans day yesterday, the rise in front-end Treasury yields overnight placed further pressure on the pound, pushing GBPUSD down to fresh year-to-date lows. The pound has broadly rebounded, however, as the dollar has come off of its highs now European markets have opened. As it has been for the whole week, the focus will remain on bond market price action today, especially as spreads adjust over the course of the session with US bonds now online. For the pound, the data calendar remains light, however, events in the political space will be in scope as Brexit Minister Lord Frost is set to meet his EU counterpart Maros Šefčovič later in what has been dubbed a pivotal week for UK-EU relations.
While yesterday’s price action was nothing to write home about, developments in European stock markets following positive news from Evergrande may have put a floor under the euro along with upgraded growth forecasts from the EU Commission. China’s Evergrande deflected another default at the last minute for the third time in the past month, as it has been stumbling from deadline to deadline in recent weeks. A failure to pay would have resulted in a formal default and would have triggered panic in European stock markets given Europeans’ share in Chinese real estate. Meanwhile, the European Commission expects the eurozone economy to grow faster in 2021 than previously thought, and expects the recovery to strongly continue in 2022 with deficits and public debt falling. The 2021 forecast was upgraded from 4.3% to 5.0%, while inflation is set to reach 2.4%. While this could be supportive for the euro by itself, downside risks for the euro outlook are looming following the migrant crisis on the Belarusian-Polish border, especially after Alexander Lukashenko threatened to cut the transit of gas and goods through Belarus to Europe if the EU imposes further sanctions on his country. With gas prices sitting near record highs and concerns over low supplies ahead of winter being prominent, an escalation could see gas prices rise further while inflation fears could spiral. On the calendar today is euro area industrial production from September at 10:00 GMT. At 18:00, Dutch prime minister Mark Rutte will host another press conference just a week after Covid measures have been tightened. News outlets expect another 3-week soft lockdown, with renewed restrictions on the hospitality sector and working from home mandates.
Yesterday’s dollar action was relatively muted with the US equity and bond markets among others enjoying a bank holiday after Wednesday’s tumultuous session. The DXY index continued to strengthen this morning and reached a fresh 15-month high as policy expectations from the Fed remain high following the concerning inflation report that showed broad-based pressure. At the same time, the dollar may be benefiting from renewed tensions between Russia and the US after the US warned EU allies that Russia may be planning to invade Ukraine. Washington is now closely monitoring the situation, according to a White House official. US officials also believe Russia has orchestrated the migrant crisis between Belarus and the EU to destabilise the region, but this has been denied by Russia. While the flare-up in tensions has weighed on the ruble over the past 24 hours, it could keep the dollar buoyant in today’s session.
The Canadian dollar slipped 0.69% against the US dollar in yesterday’s market as the dollar broadly went bid and oil markets slipped further after falling as much as 4% on Wednesday. The loonie now trades at its lowest point since early October, with the repricing in bond markets still placing pressure on broad FX markets following Wednesday’s CPI release. The data calendar remains sparse for the Canadian dollar today, with few drivers in sight apart from bond market dynamics. Loonie traders will be keeping an eye on overnight lows, which aligned with yesterday’s lows, before the currency reversed its momentum as the dollar broadly softened on the European open.