Daily Market Pulse

Choppy, range-bound trading in the major currencies continues. The US PMI data and a sloppy 5Y auction yesterday helped drive US yields higher and lift the USD off its lows but markets are not showing an awful lot of conviction either way at this point, with event risk looming large on the near-term horizon. Focus today turns to Q4 GDP which is expected to reflect a slowing the pace of growth to around 2.0% (the Atlanta Fed’s GDP Now tracking currently sits at 2.2%).

There is also the small matter of the ECB policy decision, the PCE data tomorrow and—stretching into next week—the FOMC and month-end. The FOMC may give markets a better sense of whether March/ May decisions are “live” or not and help shape trade over the next few weeks. Intraday moves so far today reflect a generally softer USD.

High beta FX is leading gains, with the NOK outperforming after the Norges Bank held its policy rate at 4.50% but said rates would have to remain high for some time to push prices lower. Commodity prices are a little firmer and Chinese and HK stocks had another solid session on stimulus hopes.

EUR/USD - A neutral hold is the likely outcome of today’s ECB policy decision. Policymakers are in data-dependent mode and not much, new information is available for discussion today. Recent comments from key policymakers—including President Lagarde – have clearly steered market expectations towards the idea that no move lower in rates is likely before June at this point. Swaps still reflect 16-17bps of easing for the April meeting, which looks too rich, given current guidance so some repricing of ECB risk may give the EUR a mild lift today but there does not appear to be a lot of runway for EUR bulls to exploit at this point.

GBP/USD - The CBI’s Distributive Trades Survey suggests that a weak retail environment persisted in the early new year. January’s data showed the volume of sales falling sharply this month, reaching the weakest since early 2021. Sales for the time of year were weaker as well. Sterling is little changed on the day, however, with spot continuing to respect recent ranges. The more aggressive repricing of BoE rate cut risks this year is underpinning the GBP.

USD/CAD - Ultimately, the BoC policy decision did not resolve much for the near-term CAD outlook either way. FX homed in on the removal of the tightening bias in the policy statement, although the risk of more hikes had been very remote for some time. And Governor Macklem kept the risk of higher rates on the table in his prepared comments anyway. Rates rather reacted to the Bank’s clear and obvious worries about inflation and the risk of “high for longer” policy, paring a few bps off easing bets in March and April. The stronger than expected US PMIs weighed on the CAD perhaps as much as the BoC decision itself – SB.