With UK markets closed yesterday, liquidity conditions on Monday morning resulted in GBPUSD opening at a much lower rate than Friday’s close. As conditions improved, however, the pound rallied back up towards Friday’s closing price before it resumed a mild sell-off as the broad dollar strengthened in yesterday’s session. This morning, price action in GBPUSD should be more representative of underlying fundamentals as UK markets reopen after a four day weekend, while liquidity is also injected from other European nations that are also set to return. This week, the data calendar out of the UK is thin. Bank of England Monetary Policy Committee member Catherine Mann is set to speak on Thursday at 14:00 BST on monetary policy making during times of uncertainty, with BoE Governor Andrew Bailey speaking at 17:30 BST at Macro Week 2022 held by the Peterson Institute of International Economics. Then on Friday, retail sales for March and preliminary PMI data for April populate the calendar at 07:00 and 09:30 respectively.
The ramping up of bets on the Federal Reserve’s tightening cycle is weighing on EURUSD this morning, especially as last week’s European Central Bank meeting wasn’t as hawkish as some market participants had hoped for. This is widening the yield differential between the Fed and ECB, which combined with the ongoing war in Ukraine, does not favour the single currency. Volodymyr Zelensky reported that Russian forces have begun the campaign to conquer the Donbas region, after Russian forces intensified attacks along the frontline. He vowed that Ukraine would defend itself “however many troops they send there”. The EU is planning to establish a solidarity trust fund to finance Ukraine’s reconstruction. This will likely remain a big topic in the newswires over the next weeks as senior officials in Brussels and Washington are set to meet to discuss ways to support Kyiv financially. In the background, markets continue to focus on French elections, after Emmanuel Macron regained some momentum over far-right presidential candidate Marine Le Pen, just a week ahead of the second round. Le Pen is facing allegations that she and members of her party misused hundreds of thousands of euros of public funds between 2004 and 2017, when she was a member of the European Parliament. Le Pen has denied the accusations, but two polls released this morning show Macron’s lead is growing marginally amid the news. For today, the focus will remain on geopolitical and political headlines along with developments in interest rate markets amid a lighter data calendar.
The broad dollar, as measured by the DXY index, continued to rally over the course of Friday’s session despite the Federal Holiday in the US, marking a 0.86% return on the week. The greenback continued in earnest on Monday as US yields received another boost from Fed member James Bullard. Although a well-known hawk, Bullard stated that a 75 basis point rate hike at May’s meeting isn’t off the table despite it not being his base case. With pressure on the Federal Reserve resuming from US fixed income markets, after a brief hiatus mid-week last week following an underwhelming core CPI release, pricing in US rates markets will prove key again this week. Meanwhile, with the presence of Russian forces increasing in the Donbas region and deadly airstrikes hitting Lviv near the Polish border, market risk sentiment looks to be fragile again this morning. The combination of high US yields and tentative risk sentiment due to geopolitical events is likely to keep the performance of equities in scope for global macro traders. At the moment, however, US equity futures are sitting in the green, while European stocks feel the heat from an escalation in the war in Ukraine. More pressing for the broad dollar’s price action are events in USDJPY as the yen extends its longest losing streak in at least half a century. The move came despite comments from Finance Minister Suzuki who stated he is monitoring the moves with a strong sense of vigilance. After posting losses this morning, the yen has slid lower for a 13th consecutive day today. Accounting for over 13.5% of the DXY index, the 0.65% increase in USDJPY overnight means the DXY index sits higher again this morning. This week, most of the focus for traders will be on Federal Reserve speakers ahead of Friday’s preliminary PMI data. Comments from Fed member Evans will be on the roster for today at 17:05 BST, with the likes of Daly and Bostic tomorrow before the Fed releases its beige book at 19:00 BST. The beige book summarises economic conditions in the US.
After enjoying a three-day weekend, North American traders yesterday sold the loonie in favour of the broadly strengthening US dollar. This came amid rising US bond yields, which likely overpowered the $1 increase in the price of a WTI barrel. This morning, however, with liquidity conditions returning closer to normal in the European session, the loonie has retraced most of yesterday’s losses as US bond yields moderate in the futures market. This week, events in Canada remain significantly light, with just March’s CPI inflation data out on Wednesday and February’s retail sales data on Friday. Out of the two, the inflation data will prove the most influential for CAD, especially in light of last week’s 50bp hike by the Bank of Canada. Headline inflation is set to rise from 5.7% to 6.1%, with the core measures also set to increase due to second round effects. A slight miss in the inflation data will spell trouble for CAD bulls, however, as markets will begin to price out expectations of a successive 50bp hike by the BoC in June. Currently, overnight index swaps are pricing an 85.5% probability of a 50bp hike, but this is subject to change over the course of the next month.