News & Analysis


The Canadian dollar fell 0.33% over the course of yesterday’s session as copper prices tumbled over 3%, while other commodity prices including lumber also moderated from recent highs. This weighed on the Canadian dollar, despite a higher oil price helping other petro-linked currencies like NOK and MXN. This is largely due to Canada’s more diversified extraction sector, meaning the slide in industrial materials weighs on Canada’s economic outlook more than other oil-rich economies. The loonie touched a 7-week low during yesterday’s session as it retraced the recent move that resulted in a fresh 6-year high being printed. The focus for the loonie today will be the FOMC tonight and what this means for front-end rate differentials, which have heavily supported the CAD rally since the BoC began to taper and signalled rate lift-off as early as H2 2022. Prior to the Fed, however, is Canadian CPI data at 13:30 BST, which is expected to rise from 3.4% to 3.5% in May. The dynamics behind the inflation print are key as policymakers continue to suggest the overshoot is transitory, similar to that in the US. For this reason, the inflation data is unlikely to have much of a market impact unless the signs in the underlying data suggest the price growth will be more sustained than policymakers suggest.


The DXY index is trading near one-month highs as markets await the Federal Reserve policy decision tonight at 19:00 BST, which may enlighten investors with a clearer timeline for the tapering of asset purchases. The economic data since the April meeting included two weaker-than-expected labour market reports, although seasonal adjustments likely had a distorting impact on the numbers, while inflation prints overshot expectations several times. The mix of data was paired with some Fed members shifting their tone to take on a slightly more hawkish stance, although other members stated this shouldn’t be mistaken for a shift in policy of any sort. Some Fed officials have continued to cast a dovish message over the last few months despite the firming of economic data, which leads us to believe the FOMC will reiterate the transitory nature of the currently elevated inflation. What will be of importance tonight is the so-called dot plot – the Fed officials’ individual projections for interest rates. Previously, seven out of 18 members foresaw a rate change through 2023, while four expected rates to be lifted next year already. The new dot plot may show more policymakers expect to raise rates in the next two years, although this does not mean the Fed will change its stance on inflation. If the Fed continues to cast a dovish tone tonight and look through the improving economic data, the dollar may bear the brunt of it, which would mean a halt to the recent USD strength, while any comments around the economic backdrop improving and uncertainties decreasing could see the dollar strengthen.


The euro posted mixed results across the G10 space yesterday while swings in the US dollar took EURUSD up and down throughout the session before closing the day almost flat again. Final CPI inflation figures from France and Germany didn’t move the needle for the euro as neither of the second readings posted any change from the first. Headlines around European Central Bank President Christine Lagarde suggest that it was Lagarde’s comments several weeks ago when she said it is “far too early” and “actually unnecessary” to think about bringing down the pace of asset purchases, which forced the Governing Council into making the decision to run significantly higher purchases going into Q3. This was confirmed by an official familiar with the matter, which suggests it may not have been the consensus view among policymakers to maintain elevated purchases. With today’s economic data calendar being virtually blank, markets will focus on speeches by ECB members Frank Elderson and Luis de Guindos at 09:00 and 10:00 BST ahead of tonight’s pivotal FOMC decision.


Sterling plummeted 0.2% over the course of yesterday’s session, but losses exceeded 0.5% at one point as limited liquidity and low volatility set the perfect environment for options traders to push the price of spot GBPUSD down to the strike price of their put options due for expiry. Coupled with a technical break in the currency pair, momentum exacerbated the move south, which was highlighted by its swift return back to limit losses. Today, the pound has completely reversed yesterday’s drop against the dollar after UK inflation data showed consumer prices rising at the fastest pace since August 2018. Headline CPI rose from 1.5% to 2.1% in May, above the Bank of England’s 2% target, while core inflation jumped from 1.3% to 2%. The central bank is likely to label the rise in prices as transitory, similar to the view taken by the Fed, as reopening effects see nominal prices return to pre-pandemic levels. This is true when looking at what drove the rise in core inflation, namely clothing prices which rose from 0.5% to 2.6%, restaurants and hotel prices which rose from 1% to 1.8%, and package holidays which rose from 1.8% to 2.3%. All of these categories were heavily hit by the imposition of lockdown measures and benefited from renewed demand as lockdown measures were lifted. Whether the price rises are sustained will be more of the question, but there is yet any sign of such an occurrence. With the UK data out of the way for today, the focus will now shift to the broad US dollar and how markets digest the latest policy signals from the Federal Reserve.



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