News & Analysis


Heading into yesterday’s Bank of Canada meeting, the loonie traded over half a percentage point higher against the dollar as markets positioned for earlier action by the BoC relative to the Fed. Following the BoC’s announcement that rates are set to remain at 0.25%, the loonie reversed all of its daily gains to sit flat despite the Bank teeing up a rate hike at March’s meeting. While the Canadian dollar flirted with trading higher, such that half of its lost gains were recovered, during the press conference, the loonie’s bullish bias was soon to be crushed come the Fed meeting. It took until the press conference to see substantial price action, but after Chair Powell’s commentary on there being “plenty of room” set US bond yields on a rampage, the direction of travel for the loonie was only going to be one-way. USDCAD rose 0.33% when the session finally ended, with a further 0.3% rise recorded overnight as European markets open. Today, given the limited data calendar, the loonie is likely to focus heavily on the rates space and the impact its hawkish repricing has on spreads and equity markets.


In the absence of any new Russia-Ukraine headlines and ahead of the FOMC policy meeting, volatility in the DXY index – a gauge of USD strength – was rather contained for most of yesterday’s session. The release of the Fed’s January policy statement in the evening didn’t come as a shock to markets and generated little volatility across all asset classes. Markets were awaiting the potential end to QE along with stronger hints of rate hikes beyond March, however, the statement was only tweaked marginally to include reference to a strong labour market while the Fed brought forward its timeline for the end of QE from mid-March to early March. The statement did contain one slight hawkish surprise, namely the supplementary market notice entitled “Principles for Reducing the Size of the Federal Reserve’s Balance Sheet”. This suggests that the central bank is laying the foundations for quantitative tightening after December’s meeting minutes showed that discussions around the topic had already begun within the FOMC. During the press conference that started half an hour after the release of the statement, volatility in markets quickly picked up as Chair Powell, who usually chooses his words carefully, stated there is “plenty of room to raise rates” without disrupting the labour market recovery. This meant US Treasury yields took off, with the 2Y extending its rise to a fresh high of 1.18 while the 10Y saw its peak last night at 1.87. The remainder of the press conference held little new information, but the damage was already done after his commentary suggested a steeper rate path to that of 4 rate hikes this year prior to the meeting. The dollar’s gains extended onto this morning’s session, ahead of the US-centric data docket which includes local GDP, durable goods orders and jobless claims at 13:30 GMT.


Markets enjoyed a temporary breather from Russia-Ukraine headlines yesterday, which drove a more risk-on sentiment throughout the day in most currency pairs before the Bank of Canada and FOMC meetings took place. While risk-on moves are usually beneficial to EURUSD given the euro’s procyclical nature and the US dollar’s safe haven status, yesterday’s session still saw EURUSD moderately weaken across the day given the euro’s sensitivity to moves in US bond markets. With bonds selling off throughout most of the session and US yields rising, pressure remained on the euro. A similar dynamic was seen in USDJPY, as the Japanese yen also is more vulnerable to US yields. Overnight, the widening in spreads between eurozone and US yields continued to push EURUSD lower in the aftermath of the Fed, with the single currency trading in the red this morning. Political developments also impacted bond markets. Italian bonds extended their bear steepening move, setting the BTP-Bund spread – a measure of eurozone risk – on course for its widest close since September 2020 after a third round of voting ended with no newly elected President. The winning candidate needs a majority of 673 votes, however, the counting in Italy’s lower house hasn’t seen any candidates reach that majority yet. This weighed on the Italian bonds as it suggests the election outcome may be less clearcut than initially expected. Markets will tune in to Bank of Malta Governor Edward Scicluna’s speech at the ESBG Spotlight Event at 13:30 GMT today, ahead of next week’s European Central Bank meeting.


The pound, along with most other currencies, sat under substantial pressure in yesterday’s session following the hawkish comment from Fed Chair Powell about there being plenty of room to raise rates. Overnight, OIS markets have gone from fully pricing in four 25bps rate hikes from the Fed to five this year. This hawkish sentiment wasn’t just contained to US rates markets, however, with traders increasing their bets on another 25bps hike from the BoE in February such that it is now fully priced in by markets. In addition to that, money markets now expect rates in the UK to rise to 1% in June, bringing forward their expectations by one meeting from August. While the Fed’s hawkishness is being replicated in UK assets, especially equities with the FTSE 100 set to open substantially in the red this morning, the pound isn’t finding much relief from UK rates moving in lockstep with the US. With little in the calendar until next week, sterling bulls may have to ride out these headwinds before the Bank of England breathes some renewed optimism back into GBP. On the political front, final legal checks on Sue Gray’s report into partygate have delayed the report until at least Monday, meaning pressure on the Prime Minister is likely to remain over the weekend.




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