Markets Report - 05 May 2022

A daily breakdown of the markets for the 5th May 2022, provided to you by Sterlex.

🇪🇺💶EURUSD rallied near a percent in the aftermath of the Fed decision as US Treasury yields dropped and the rate differential between the continent and the US narrowed. This morning, Executive Board member Fabio Panetta highlighted the weakening in growth conditions, stating that the eurozone “is de facto stagnating”. Along with JPY, the low-yielding euro benefitted substantially from the more dovish tone taken by Fed Chair Powell at yesterday’s meeting. While the euro’s performance wasn’t spectacular in the grand scheme of the G10 move, it came as a relief to ECB members as it lifted the currency from recent multi-year lows against the dollar at a time when energy imports priced in USD are already having a significant impact on eurozone inflation. On the ECB, Governing Council member Madis Muller reiterated Isobel Schnabel’s comment that a rate hike in July is likely despite ongoing growth concerns. Regardless of public concerns around growth conditions, the single currency is trading stronger against most of the G10 currency board excluding USD as FX traders buy the dip in the broad dollar overnight in the APAC session as Treasury yields also trim losses.

🇬🇧💷🌍At 12:00 BST, the BoE is likely to raise rates by 25 basis points to 1%, a move that is largely expected by economists. After the documentation is released, Governor Bailey and his deputies are set to speak to the press at 12:30 BST. This will undershoot money market expectations substantially, with swaps currently implying 125bp of tightening by September. This suggests a year-end rate this year of around 1.25-1.5%, with risks that a higher Bank Rate will tip the economy into recession or deepen the economic contraction already underway due to the cost-of-living crisis. Sterling’s weakness is likely due to traders reducing their positions ahead of today’s Bank of England meeting, which is set to see policymakers substantially under-deliver on money market expectations. After rallying over a percentage point in yesterday’s session post-Fed decision, the pound is one of the early losers in the G10 space this morning as it trades 0.7% lower against the dollar and nearly half a percentage point lower against the euro. We have long argued that a dovish money market repricing is unlikely to dent GBP too significantly as GBP traders have factored in a weaker growth outlook more accurately than swap traders over the past month, however, the move is likely to cause some GBP volatility at a minimum. However, the accompanying documentation, such as the meeting minutes and the Q2 Monetary Policy Report (MPR) is set to outline the precarious growth backdrop the Bank currently faces, which suggests a more cautious policy stance ahead.

🇺🇸 🏦The dovish repricing came despite the Fed hiking rates by 50 basis points for the first time since May 2000 and outlining their plans to “phase in” the maximum quantitative tightening plans by allowing $30bn in maturing US Treasuries to roll-off of the balance sheet until that is raised to $60bn in September. After trading tentatively lower in the run-up to the May Fed meeting, dollar downside was consolidated after Fed Chair Powell took the prospect of a 75 basis point hike off the table while also eluding to a more conservative rate path to neutral territory than markets had previously been pricing. All of which posted gains in excess of a percentage point in yesterday’s session. This morning, US Treasury yields are reflating somewhat, but still trade substantially off of yesterday’s highs. This has provided the dollar with a modicum of strength as it retraces part of yesterday’s move. The dollar’s downside was most visible in risk sensitive currency pairs, such as AUD, NOK, ZAR and MXN. However, we expect USD downside to become more visible in the coming days unless regional Fed speakers or Friday’s nonfarm payrolls provides enough for markets to turn more hawkish on the US central bank again.