The USD rally took a breather yesterday as long-term US rates retraced. The front end continues to discount an aggressive Fed rate hike cycle, as the latest Fed Beige Book published yesterday evidenced increasing and broadening inflationary pressures, which strengthens the case for a larger 50bp move at the May meeting. Such prospects of an accelerating Fed tightening could be further reinforced today by Fed Chair Jerome Powell as he participates in the IMF panel alongside ECB President Christine Lagarde, although these positives already are largely priced in by the USD. Ultimately, all eyes could instead be on the press conference from US Treasury Secretary Janet Yellen. Market participants will assess how comfortable US authorities are with the latest USD strength and its trade-off between the lid it keeps on global growth prospects and its cooling effect on domestic inflation. The USD is unlikely to get any near-term direction from today’s US macro releases (weekly jobless claims and April Philly Fed).
The biggest mover amongst G10 currencies over the last 24 hour has been the Canadian dollar which strengthened by just over 1.0% against the US dollar. It has resulted in USD/CAD falling back below the 1.2500-level after briefly hitting an intra-day high of 1.2676 on 13th April. The main driver for the Canadian dollar’s rebound was the release yesterday of the much stronger than expected CPI report from Canada. The report revealed that headline inflation accelerated sharply to 6.7% in March up from 5.7% in February. It was the highest headline rate since January 1991. The negative inflation developments will increase pressure on the BoC to lift their key policy as quickly as possible and the BoC is now expected to deliver at least two more 50bps hikes at the next two policy meetings on June 1st and July 13th. The combination of higher yields in Canada and elevated energy prices should continue to support out bullish outlook for the Canadian dollar.
Opinion polls post last night's French presidential TV debate suggest President Emmanuel Macron avoided any pitfalls and is still favoured to win Sunday's second-round run-off. EUR/USD has not moved much - largely because wide rate differentials support it trading down at these levels. EUR/USD also has not enjoyed too much of a bounce on the back of hawkish comments from three ECB members over the last 24 hours - all pointing to the risks of a rate hike in July and presumably the deposit rate ending the year in positive territory - as opposed to the consensus of hikes in September and December. We doubt the debate over whether the ECB hikes 50bp or 75bp this year makes too much difference for EUR/USD - which we expect to trace out a broad 1.05-1.10 range over coming months. For today, 1.0800-1.0900 looks like the range.
The next take on UK activity is not released until tomorrow with March retail sales and the April PMIs. PMIs are also released across the eurozone as well, meaning we can see the relative damage done to sentiment by the war in Ukraine. We think GBP is more vulnerable to dollar than euro strength at the moment - and GBP/USD would come lower if and when the global equity environment soured on tighter financial conditions