News & Analysis


The pound followed the broad G10 move against the dollar yesterday as it rallied 0.16% per cent. Relative to the euro, however, the pound underperformed, resulting in GBPEUR dropping 0.17% on the day. The only notable development out of the UK yesterday occurred in a speech from Bank of England Committee member Catherine Mann. Having voted for a 50bp hike at last week’s meeting, Mann outlined that more decisive action is needed from the Bank to prop up the pound and prevent further inflationary pressures from being imported. However, despite her measured calls for faster and more aggressive action from the central bank since early May, the consensus among the monetary policy committee remains one of incrementalism. We still expect the BoE to underwhelm market pricing, and expect this is the reason why hawkish commentary falls to the wayside for GBP traders at present.


Despite being tested in the early part of last week just days after their latest policy meeting, the ECB has finally got its ducks in a row. An emergency meeting and a string of individual commentary to financial outlets have finally resulted in the narrowing of peripheral bond spreads in the eurozone. Despite previously stating that the ECB isn’t there to “close spreads”, Lagarde and Co are doing a pretty good job of it at the moment as the 10-year Italian BTP – German Bund spread has fallen from a peak of 2.4% to just under 1.95% at the time of writing. While the new anti-fragmentation tool isn’t due to be announced until the central bank’s next meeting on July 20-21st, reference to its flexibility, unbounded nature, and earlier arrival if needed has forced speculative spread widening positions to exit the market. Speaking yesterday, Lagarde stated that “anybody who doubts that determination will be making a big mistake”. With risk premia in eurozone bonds now falling, the path higher for EURUSD in the near-term is becoming smoother. Today, focus will rest on how US markets reopen after the long weekend and whether price action in bond markets derails the risk-supportive backdrop in markets.


Despite the turmoil in markets last week, yesterday marked a quiet session for FX markets. A welcome break from the flurry of central bank meetings that created tremendous market volatility last week, and the closure of US markets for the Juneteenth holiday, meant there was a mild risk-on bid in the absence of any calendar-based events. Global equities led the charge in lieu of pressure from US Treasuries. As a result, the DXY index fell two-tenths of a per cent to 104.48. A similar mild risk-on bid persists today, with most G10 currencies trading in the green up to 0.4% against the dollar. Despite the US Treasury market reopening with the curve up around 5bp higher, global equities continue to point higher. The economic calendar repopulates today, with Fed members Barkin and Mester set to hit the wires and May’s existing home sales data due out at 15:00 BST. Commentary from Fed officials today will likely sound more neutral than St. Louis President Bullard’s yesterday. The notable ultra-hawk stated that the Fed is currently fighting a credibility crisis and further action is needed to stop inflation expectations from becoming “unmoored”. Bullard has long called for much higher rates, but despite calling the tune right in the FOMC for the past six months, markets still take his comments with a pinch of salt.


After a volatile week, the Canadian dollar is trading on a firmer footing this week against the dollar. A rebound in crude oil prices and stronger global equities has reduced the risk premia in the loonie as the currency now trades 1.2% higher relative to last Friday’s low. Retail sales data for April stands out as the main event for USDCAD today at 13:30 BST/ 08:30 ET, although focus will rest heavily on tomorrow’s action. At 13:30 BST/ 08:30 ET tomorrow, May’s CPI report will be released, and if it falls in line with market expectations, is likely to see the Bank of Canada follow in the Fed’s footsteps in hiking rates by 75bps. This could be confirmed just a few hours after the inflation data is published as BoC Senior Deputy Governor Carolyn Wilkins is set to partake in a fireside chat with the Globe and Mail. Given BoC members relay the consensus view among the Governing Council when speaking at public events, hawkish comments by Wilkins at tomorrow’s fireside chat will only cement expectations of a larger rate hike.



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