News & Analysis


In an eventful day for international markets, Canada sat on the sidelines yesterday. No news nor Canadian data hit the wires, leaving transaction flow and cross-asset correlations to determine the price action in USDCAD. With a marginal gain against the dollar, the loonie nevertheless squeaked out another fresh high since last September, maintaining the overall trend of upward momentum. This was supported primarily by an increase in Canadian yields, which saw the 2Y rise by 11bps, faster than all of its advanced economy peers. Today will probably be no different as no data releases are scheduled, leaving US and global developments to determine whether the recent trend remains intact.


Following Wednesday’s testimony to Congress, where Fed Chair Powell once again struggled to convince markets to buy into his hawkish messaging, yesterday’s session proved something of a reversal of the prior days dollar selloff. This did not come, however, from an increase in rate expectations, which continue to struggle with pricing more than one more rate hike from the Fed. Instead, some decent housing market data that showed existing home sales grew in May by 0.2% provided some reassurance over the state of the property sector, having fallen by 3.4% the months prior. Today, flash PMI data should provide a more detailed snapshot of how the US economy is holding up under the pressure of significant monetary tightening from the Fed. Market expectations currently foresee a modest expansion in activity, pushing back on calls for a US recession and putting a soft landing scenario very much in play for policymakers. With an underperforming Chinese economy, a eurozone that looks to be slowing and a BoE seemingly intent on tipping the UK into recession, signs of US economic outperformance should be modestly supportive of the dollar, with the dollar index already ticking up, currently up by around three tenths to start the session today.


Amidst a market overwhelmed by the latest surprises from G10 central banks, the EURUSD pair was mixed yesterday, with high volatility levels compared to the last few days. Ahead of the BoE announcement, during the European morning, the pair managed to do something that few expected: break the 1.10 threshold. However, as expected, these recent highs did not last long and the euro eventually depreciated by more than 0.30% against a US dollar that, as measured by the DXY index, strengthened by nearly 0.40% on the day. With the ECB’s hawkish rhetoric still trying to shape euro market sentiment, today will be a key day to see if this has a place in the market narrative and if signs of a slowing growth outlook are finally confirmed with the release of the eurozone’s June Flash PMIs that are the main event in Europe today. Composite readings for both France and Germany are expected to trend modestly lower, while just about remaining in expansionary territory. However, the trend of recent releases is set to continue, with robust expansion in services offsetting significant contractions in the manufacturing sector. With the trend across both France and Germany set to lead aggregate Eurozone figures modestly lower, this will be welcome news for the ECB, where recent commentary has titled hawkish. Markets will get a better idea of what policymakers are currently thinking on the path for Eurozone rates next week, with Sintra due to kick off on Monday. Also known as the ECB Forum on Central Banking, the event sees central bankers from across Europe, and further abroad to discuss developments in monetary policy. In particular, with the ECB doves having been notably quiet in recent days, it will be interesting to see if next week’s events see emerging fissures amongst ECB speakers with the central bank widely thought to be close to the end of their hiking cycle.


A shock 50bp rate hike from the Bank of England yesterday really caught markets off guard. Despite OIS pricing suggesting a roughly one in three chance that a larger rate hike might be on the cards, the unanimous view of economists surveyed by Bloomberg were looking for a 25bp going into the decision. It was therefore a huge surprise when the BoE hiked Bank Rate to 5.00% and provided almost no guidance regarding the path forward for monetary policy. Given the lack of any indication that such a move was being considered, the move suggests a BoE in full on panic mode, likely sparked by the hot CPI reading seen on Wednesday. This was the fourth in a row, and in the context of wage data that continues to trend in the wrong direction, has raised fears that a full-blown wage-price spiral is now underway in the UK economy. In our view this points towards further rate hikes from the BoE, and we look for successive 25bp rate rises in both August and September. But with both wage and inflation data likely to show more obvious signs of cooling in the second half of the year, we think the BoE is likely to undershoot current market pricing which currently looks for four or five more rate hikes. For sterling, the impact of yesterday’s decision was not exactly positive. Despite typically being supportive for a currency, yesterday’s rate increase put fears around growth and financial stability front and centre for traders. These risks weighed on the pound over the course of yesterday’s session, with sterling falling 3 tenths against the dollar following the rate decision but managing to hold its ground against the euro. Today’s price action will see markets continue to digest the BoEs latest surprise, with retail sales data coming in better than expected and PMI data also due later at 9:30 BST. Better growth indications should be more supportive for sterling, suggesting an economy better able to handle the impending monetary tightening, but any signs of weakness will supercharge yesterday’s moves lower.

FX Elsewhere

Yesterday saw a raft of central bank decisions beyond just the BoE. The SNB hiked by 25bp, modestly disappointing market expectations that saw a small chance of a larger rate increase, with the Swiss franc selling off in response. The Norges Bank in contrast did the opposite. With the meeting being viewed as a toss-up by markets, the Norges Bank hikes by 50bp, leading NOK higher by almost 1.5% against the euro,  before giving back most of these gains over the course of the day. The greatest move though came in Turkey where the CBRT tightened policy significantly, taking rates to 15%. Despite the size of the move, this actually fell at the low end of expectations resulting in a sharp selloff in the Turkish Lira.



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