Global FX markets appear a little calmer today, helped by some stability in Chinese asset markets. Despite the ongoing lockdown in Shanghai, Chinese equities are up over 2% today and the renminbi seems to have found some temporary support. Tension in equity and credit markets earlier this week has seen pricing of the Fed tightening cycle cut by 10-15bp. Yet rhetoric from the Fed remains very hawkish. The message seems to be that the policy rate needs to be taken to neutral as quickly as possible and then the Fed will see if it needs to do more (not less) tightening. Feeding into that story will be today's US April CPI release. Headline year-on-year inflation may well be past its peak, helped by base effects and used car prices, yet the focus will still be on the core month-on-month figures. A still high 0.4% MoM core inflation increase is expected today. Unless that surprises at something like 0.2% MoM, we would expect the dollar to stay largely strong - or consolidate near the highs.
Stocks have steadied overnight but the CAD has failed to respond positively to the improvement in risk appetite as oil prices have softened somewhat even as the EU continues to work on its Russian oil ban and Saudi Arabia warned that producers are running short of capacity. The CAD has little opportunity to escape from the influence of the risk backdrop for now, with no domestic data on tap over the remainder of the week. The CAD looks fundamentally soft around 1.29/1.30. Elevated risk aversion market volatility will keep the CAD tone defensive in the short run. Observe the USD/CAD chart.
We have seen lots of commentary from the European Central Bank over recent weeks, where the core message seems to have been a more hawkish one - managing expectations towards the first hike in July. Somewhat surprisingly, market expectations for ECB policy rate changes this year have been quite steady over recent weeks, with 85bp of hikes now priced in. We have a whole host of ECB speakers today, who will probably support that pricing. Yet we doubt EUR/USD derives much support until Fed tightening expectations falter - and that seems unlikely. With the EU moving ever closer to a full embargo on Russian energy - with negative implications for European growth - the 1.0500 floor in EUR/USD does not look particularly strong.
GBP is consolidating ahead of tomorrow's data dump - which includes 1Q22 GDP and March activity data. Expect further range trading, although politics is never far and could weigh on it at any time. Here UK-EU trade relations seem to be deteriorating again, with Downing Street threatening to unilaterally suspend parts of the Northern Ireland protocol. Doing so could spark an unwelcome trade war. GBP/USD is consolidating after heavy losses. A technical correction could see 1.2500 before the bear trend resumes to drag GBP/USD to 1.20. That certainly looks the direction of travel over coming weeks and months.
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