Testimony from Federal Open Market Committee Chair Jerome Powell yesterday effectively pre-announced a 25bp Federal Reserve hike on 16 March. The Fed sees its most helpful contribution to economic stability now as a focus on inflation – a move supported by the White House. US interest rate futures had a big adjustment on the back of Powell's testimony, effectively restoring 20bp to the expected Fed tightening cycle this year.
A hawkish Fed has kept the dollar reasonably well supported. Trade-weighted measures of the dollar continue to trade close to the highs of the year. With regards to the war in Ukraine and Russian sanctions, some buyers are now trying to avoid Russian crude deliveries. The fact that 10 million barrels per day of Russian production could come into question has sent Brent to $117. For today we have another round of Powell testimony and the ISM services index. Expect the dollar to remain in demand.
The CAD outperformed yesterday, largely thanks to the rally in energy prices while the BoC did its part by sticking to the plan and raising rates by 25bp to 0.50%. The bank highlighted the increasing geopolitical uncertainties, while noting that the Canadian economy went into 2022 on a stronger footing than initially expected in January, and inflation faces more acute upside pressures than expected in January. Against this backdrop, the BoC stuck to its guidance that interest rates will need to rise further, while not giving much more details either. All in all, we expect the BoC to go for a faster tightening start relative to the Fed, with two additional 25bp hikes being on the cards in Q222. Such prospects could support renewed CAD out performance vs the USD in the medium term, as a less clouded and less uncertain geo-political outlook could make way. observe the USD/CAD Chart.
Europe has emerged as the focal point of the stagflationary and geopolitical angst in the markets. In turn, the EUR seem to have become the pressure valve for the escalating investor fears. In addition, the rates markets have slashed their rate hike expectations ahead of the ECB meeting next week where the governing council is expected to keep its dovish policy stance given the Ukrainian crisis and the economic sanctions imposed on Russia. Coupled with record-breaking inflation and soaring inflation expectations in the Eurozone, this has sunk the EUR real rates and yields even deeper into negative territory and added to the headwinds for the single currency.
For today, look out for the final release of the February PMIs. These should confirm an uptick as the UK re-opens far earlier than continental Europe. It will also be hard to know, but some GBP buying/hedging relating to the divesting of Russian assets in the oil and gas sector may be helping GBP too.
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