News & Analysis


The Canadian dollar traded with relative stability yesterday despite the rise in US inflation and the swings seen in US fixed income markets. Posting marginal gains on the day, the loonie hasn’t broken out of the tight trading range it has found itself in for nearly the last month. US CPI wasn’t the only catalyst for the loonie, however, as Deputy Governor Tim Lane presented an economic update in the afternoon of the US session. Lane highlighted that near-term inflation was one of the key issues discussed at the latest policy meeting, but the recent rise in CPI above 3% was deemed transitory in nature. Beyond that, the Deputy Governor outlined how the economy had progressed since April’s meeting, and said conditions had largely followed the Bank’s expectations. Taken on the whole, Lane’s commentary further confirms our view that the BoC will continue to taper policy at a rate of C$1bn at every meeting where an accompanying MPR is released.


The US dollar is trading on the back foot this morning after yesterday’s US CPI release initially caused a bout of dollar strength across the G10 currency board. The greenback failed to hold onto gains despite prices rising by more than forecast in May. Headline CPI extended the multi-month long buildup in inflation as a low base from lockdown measures last year combined with soaring commodity prices, supply constraints, and the loosening of lockdown measures to distort the year-on-year figures. The YoY print rose by 5%, the largest gain in 28 years, while the month-on-month figures also surprised to the upside and printed at 0.6% for the headline figure and 0.7% for the core print. Although the extent of May’s overshoot in inflation may surprise the Federal Reserve as well, they are likely to stand their ground and say at the Fed meeting next week that any overshoots in inflation currently are transitory in nature. After yesterday’s session, where US 10-year yields fell 10bps to 1.43%, fixed income market price action will be in FX markets line of sight as markets position themselves for a batch of US data next week and Wednesday’s FOMC meeting.


Yesterday’s session saw tumultuous price action for EURUSD around the time of the European Central Bank meeting and the US CPI inflation release, but the pair failed to take any direction and closed the day flat. The ECB meeting, despite containing a fresh set of projections, presented little news for markets with the press statement still including the line around “significantly higher” asset purchases via the Pandemic QE programme. That line was included in the March press statement, and bond-buying has been elevated since. Going into the meeting, the question was whether the ECB was going to change its communication around asset purchases but the broader consensus and our own expectations foresaw now change. Lagarde remained highly cautious as she weighed the improvement in economic conditions against the uncertainties over the evolution of the pandemic and the loosening of containment measures. Growth and inflation forecasts were upwardly revised, but this wasn’t paired with a shift in tone. The lack of change in the statement and press conference tone however does not mean that the average bond-buying in Q3 will be as high as the ~80bn of purchases a month in the second quarter, as the ECB still has some room to reduce purchases while keeping them “significantly higher” than in the first months of 2021. For today, markets turn their focus to the G7 meeting and Central Bank of Russia policy decision.


Sterling has felt the pinch from rising Brexit tensions over the last two trading sessions, however, yesterday’s bout of USD weakness after the CPI release put GBPUSD back above its 14-day moving average.  This morning, the pound has held above these averages although trades marginally weaker over the course of the day. This morning’s data saw the UK economy expand at its fastest pace in 9-months in April as growth printed at 2.3% MoM, slightly below expectations of a 2.4% expansion. UK GDP now sits just 3.7% below February 2020’s pre-pandemic level, the smallest gap since the start of the crisis. The UK’s partial reopening from April 12th helped the jump in GDP, with strong growth recorded in retail spending, car and caravan purchases, and hospitality sectors. However, there are signs of fatigue in the recovery as the construction sector and production sector both contracted on a monthly basis. The construction sector shrank by 2% in April as new work slowed down faster than repair and maintenance work, while output in the production sector fell by 1.3% with mining and quarrying output leading the contraction with a 15% drop in activity due to temporary closures of oil production sites for maintenance. With April’s GDP reading released at 07:00 BST this morning, the only economic event left for the week from the UK is the BIS Innovation Hub at 09:30-11:30 BST, where BoE Governor Andrew Bailey, his deputies, and Chancellor Rishi Sunak are expected to speak.



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