The Canadian dollar saw very little action yesterday, maintaining its recent firmer tone against USD. With no headline data due out today either, the loonie is likely to remain out of the spotlight, and instead trade in line with overall USD sentiment.
Boston Federal Reserve Bank President Susan Collins yesterday indicated that in her view monetary policy could be entering in to a new phase, where smaller interest rate increases were required, dialling back recent hawkish sentiment on US monetary policy. Collins stated that it was “premature” to speculate on how high rates could go, however did imply that her “current thinking” was that the current market implied rate of 4.4% by year end was a “starting point”. Cleveland Federal Reserve Bank President Loretta Mester echoed Collins views, indicating that her “current view” was for the base rate to rise “somewhat above 4%” but for it to “hold there”. Combined with a general increasing confidence in economic sentiment, the US dollar weakened significantly across the course of the day. Today, the US holds its midterm elections, where all 435 House of Representative seats, and one third of the 100 available Senate seats, are up for grabs. Together, both chambers are currently held by a very slim Democrat majority, but with the Republicans only needing a net swing of six seats in the house and one seat in the Senate to take control, the elections will likely result in a shift in power in the US legislature.
The euro also took advantage of the general improvement in sentiment towards the global economy, having now gained almost 2% since last week against the US dollar. As with the pound, this move seems to be more a reflection of markets taking stock given the still historically strong levels of the US dollar, rather than the start of a trend back in to buying the single currency. European Central Bank President Christine Lagarde did double down yesterday on her recent hawkish rhetoric, reiterating that the ECB’s “primary concern” is to bring inflation levels down, despite acknowledging the environment is “difficult”. The prospect of further interest rate hikes traditionally strengthens a currency, and so Lagarde’s stance, despite being at odds with some of the ECB’s other voting members and being unpopular with eurozone political leaders, has provided a short term base platform for the euro. Today, the release of eurozone retail sales data will be the main figure due out.
The lack of any real headline economic news yesterday proved to be positive for perceived ‘riskier’ assets, and sterling took advantage of this sentiment to unexpectedly strengthen by almost 1% on average against most of its major peers. Looking across the broader FX market action yesterday, though, bodes poorly for the pound- the move seems to reflect GBP’s increasing status as a ‘risk’ currency, rather than any renewed faith in the underlying UK economy. Indeed, the release of the British Retail Consortium’s retail sales index yesterday showed consumer spending is slowing at an even faster rate than predicted, as the much-touted ‘cost of living crisis’ starts to bite. Today, the Bank of England’s Chief Economist Huw Pill is due to speak twice today, which may give some further colour as to the Bank’s direction for monetary policy.