The takeaway from the March Federal Open Market Committee (FOMC) minutes last night was that the Federal Reserve seemed confident enough about growth and the labour market, but that inflation needed to be addressed – and fast. It seems clear that the Fed would have opted to start the cycle with a 50bp hike were it not for the war in Ukraine. Some clarity was also provided on quantitative tightening – i.e. the speed at which the Fed will shrink its balance sheet. Based on the minutes and recent comments from Fed dove Lael Brainard it looks like the Fed will start shrinking its balance sheet after the May meeting, at a rate of $95bn per month. That's nearly twice as quick as was seen during the last balance sheet run down during the 2017-19 cycle.
For today, we have a few Fed speakers including the very hawkish James Bullard. His views are well known and a lot of Fed tightening is already priced in. Yet we feel the dollar can play catch-up with most of the G10 FX.
CAD - Canadian Dollar
The CAD has weakened further overnight after gains extended to the low 1.24 earlier this week. Crude oil has firmed as markets brace for more US/EU sanctions on Russia; EU officials said that the proposed ban on Russian coal could be followed by measures on oil and gas “sooner or later”. Market volatility has also dropped this week which is a headwind for the CAD. While equity market volatility remains contained most continue to expect CAD positives—strong growth, elevated commodities and the expected 50bps tightening from the BoC next week—all likely to limit CAD losses. Observe the USD/CAD chart.
EUR - Euro
EUR/USD is consolidating under 1.10 as the market waits for the EU's next move on sanctions. Comments from President Mario Draghi overnight suggest a full EU embargo of Russian gas is still some way off. It seems only a full sanction of Russian energy will be enough to see the rouble coming under severe pressure. For today, we will get to see the release of the European Central Bank (ECB) minutes for March. ECB minutes are typically less exciting than the Fed's. Money markets currently price 55bp of ECB tightening by year-end and we doubt ECB minutes will have much of an impact here. Look out, though, for any mention of the euro. The ECB has recently been expressing a little concern with EUR/USD under 1.10 and what it means for imported energy prices. EUR/USD may have a quiet day near 1.0900/1.0950 trading range.
GBP - British Pound
The challenge for GBP in the medium term will be if and when year-end market expectations for the Bank of England's (BoEs) bank rate adjust closer to 1.00/1.25% versus the 2%+ currently priced. That adjustment is probably a 2H22 story for sterling. For today, look out for a speech from BoE chief economist Huw Pill. Given high inflation that will go higher he may not want to issue a rate protest today (i.e. may not want to manage market expectations of the tightening cycle lower).
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