Global risk sentiment started to weaken yesterday during the US trading session and stock indices have opened lower across Western markets today. Let’s see whether this triggers some recovery in the bond market, after another material correction higher in yields yesterday has once again proven to be narrowly dollar-positive. Looking back at the US, the data calendar is very light today and will remain so until Friday, when inflation numbers for May are released. Some risk-off today may offer some support to G20 FX, and we think the dollar will remain broadly supported on balance, as the underlying stories of Fed tightening and good US economic momentum continue to put a floor under the greenback.
CAD - Canadian Dollar
The CAD retains a firm undertone, supported by firm stocks and robust crude oil. Last week’s Bank of Canada policy decision and communication suggest to us that the CAD is poised to strengthen further in the coming weeks as policy expectations are upgraded. Greater confidence in the BoC taking its benchmark rate above 3% in the coming months should help keep the CAD supported and pressure USD/CAD back towards the April low around 1.24 (at least) in the next few week
EUR - Euro
EUR/USD has broken back below the 1.0700 mark, largely on the back of widespread dollar strength. We’ll have a bunch of non-market moving data out of the eurozone today and tomorrow, but we might see a decrease in EUR volatility relative to other G10 currencies as a “wait-and-see” approach dominates ahead of the European Central Bank announcement on Thursday. Here is our preview of the meeting. For today, we expect either some stabilization or another marginal depreciation in the pair as external factors dominate, and we could see it test the recent 1.0627 low.
GBP - British Pound
Prime Minister Boris Johnson survived a no confidence vote yesterday evening, although as many as 148 party members voted to oust him. This is a narrower victory than the one secured in December 2018 by former PM Theresa May, who resigned six months later. We think markets are overpricing the impact of recent political noise on the UK economy and we expect volatility in the pound to decrease over the coming days, with the focus potentially shifting back to other drivers such as the Bank of England's policy or a slowing economic outlook. In our view, downside risks to the pound persist, but they are not strictly linked to the recent political developments. GBP/USD may extend the drop to the 1.2300-1.2350 area in the near term.
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