Reading through the release of the 4 May FOMC minutes suggests that the Fed had nothing but confidence in the recovery and was laser-focused on getting the policy rate to neutral as quickly as possible. Indeed, there was some reference for the need for the policy rate to go beyond neutral and into restrictive territory. Since then US equity markets have fallen a further 8-9%, with some softening in the housing data. However, the Fed seems confident with the consumption and investment story. Tomorrow's personal consumption numbers for April should support the Fed's position that the economy is strong enough to withstand 'expeditious' tightening.
Pricing of the Fed tightening cycle has corrected 25-35bp lower since early May, but Fed speak and the US data calendar suggests those higher levels for the Fed terminal rate could easily be put back into the market - which is dollar supportive. For today, We doubt today's US data of the revised 1Q GDP number, initial jobless claims or pending home sales will have much say in dollar pricing. Observe the USD/CAD chart.
The steady rebound in US equities failed to lift the CAD in a major way and softish risk sentiment is keeping the CAD on the defensive this morning. Firm crude and a modest premium for Canadian rates—which may have the potential to widen a little more in the CAD’s favour in the weeks ahead—constitute modest support for the CAD in the near-term. Today we see retail sales in Canada which should provide further direction for the loonie.
It seems the purpose of President Christine Lagarde's blog on Monday was to bring the range of ECB views back into line. Yesterday we saw ECB hawk Klaas Knot saying that he fully supports the contents of Lagarde's blog, which effectively promised 25bp hikes in July and September. EUR/USD looks to have stalled at the top of a potential 1.02-1.08 trading range this summer and we could quite easily see a near-term move back towards the 1.0500/1.0550 area as the Fed cycle is repriced higher. We struggle to see the ECB 'out-Fedding' the Fed when it comes to tightening - even though the ECB seems to be using the prospect of aggressive tightening to support EUR/USD.
The focus in the UK today is on the potential announcement from Chancellor Rishi Sunak of a £10bn fiscal stimulus to address the cost of living crisis. This could be a means-targeted measure coming through energy bills. What could this mean for sterling? The positive could be that it allows the Bank of England (BoE) more freedom to hike. The market currently prices the BoE bank rate at 2.13% for December. The negative could come through the equity channel where the windfall tax on oil, gas and electricity suppliers could deliver UK equity underperformance