Markets Report - 04 May 2022

A daily breakdown of the markets for the 4th May 2022, provided to you by Sterlex.

🇪🇺💶A reduction in US yields did prompt a brief spike higher in EURUSD, but the move wasn’t set to last as the pair closed the day out just 0.14% higher on the day. Price action in the single currency was fairly muted yesterday. The limited reaction in the single currency came amid claims by European Central Bank Executive Board Member Isabel Schnabel that it’s time to take action to tame inflation and that an interest rate hike as early as July is possible. This comes amid comments from European Commission President Ursula von der Leyen that the EU will meet today to discuss a ban on Russian oil imports that will be phased-in over the next six months. This morning, with global markets trading in a relatively subdued manner, the euro is trading flat against both the dollar and the pound. With money markets already predicting rate lift-off from the ECB as early as July, EUR traders are waiting to see if the ECB can actually walk the walk before turning around bearish bets on the currency.

🇬🇧💷🌍UK government bond yields rallied, catching up with Monday’s move higher in global bond yields, despite eurozone and US yields moderating on Tuesday. The performance in UK assets boded well for the pound for much of the day, until the US dollar bounced back in the afternoon session. The wave of dollar strength resulted in the pound closing the day out flat against the greenback. In money markets, traders toyed with the idea of pricing 125bps of hiking from the BoE by its September meeting. With the Bank of England set to announce policy on Thursday, and a 25bp hike to 1% largely expected, focus will be on the Bank’s forward guidance and assessment of economic growth conditions. This timeline implies three 25bp hikes and one 50bp hike in that time frame, with the latter move set to be the first time rates have risen by 50bp in the UK since 1995. The pound started yesterday’s session on the front foot as UK markets opened after a long weekend. Today, however, the BoE’s implied hiking path will be compared directly with the Fed’s as the US central bank concludes its two-day meeting and announces its latest decision this evening. However, sell-side analysts continue to push back against market pricing, suggesting that the Bank of England’s Bank Rate will end the year in the range of 1.25-1.5%, implying a maximum of 75bp worth of hikes over the remainder of the year. There was little in the way of market-moving data yesterday, with most of the focus resting on pricing for the Bank of England. Meanwhile, the FTSE 100 notched gains of 0.22%.

🇺🇸 🏦The South African rand notched gains of 2.1% in yesterday’s session after hitting lows last seen in December 2021 the day prior, while the Brazilian real also notched impressive gains of 1.55% to chalk off Monday’s losses. Instead, the market impact is likely to come from how quickly the Fed “phases in” its quantitative tightening regime and indications of forward guidance from Chair Powell at the press conference at 19:30 BST. The dollar fell throughout yesterday’s session as Treasury yields slipped ahead of tonight’s Federal Reserve announcement. This morning, there is a feeling in markets that this is the calm before the storm as the Federal Reserve is set to announce its first 50bp hike since May 2000 at 19:00 BST. After briefly breaking through 3%, the US 10Y Treasury yield moderated substantially throughout yesterday’s trading session, dipping as low as 2.9% at one point. However, the moderation in Treasury yields wasn’t set to last as the 10-year bounced back to close pretty much flat on the day at 2.97%. Currently, markets are pricing the peak in the Fed’s tightening cycle at 3.35% around mid-2023, with overnight index swaps implying a fed funds rate of 3% come year-end. While this had little bearing on the relief rally in EM currencies, it resulted in the dollar trimming its losses against its G10 counterparts. However, the change in rates is unlikely to fuel cross-asset volatility, largely because the Fed signalled that this move was coming via inter-meeting communications. The drop in back-end Treasury yields released pressure from the chamber for global FX markets, with more yield-sensitive currencies benefitting from the move.