Dollar remains firm as Treasury yields rise, ECB’s Sintra starts virtually today

GBP

Sterling stood firm against the dollar in the latter part of yesterday's trading session, reversing Monday morning's early downtick after Bank of England Governor Andrew Bailey reaffirmed the messaging on interest rates from last week's policy decision. In his speech, he warned that an interest rate hike could come sooner than expected despite the quantitative easing programme not being ended yet. Despite the hawkish comments and the mild gains in sterling, GBPUSD is trading at the lower ends of recent activity given the numerous narratives that are currently weighing on the pound. The government announced yesterday it will bring in the army to drive tankers around the country to supply petrol stations in an effort to stem the energy crisis. Meanwhile, Brexit concerns have again intensified after French European Affairs Minister Clement Beaune reacted to the fuel shortage, stating it reflects the "intellectual fraud" that was Brexit. Adding to this, the UK furlough programme that paid the wages of over 11 million employees ends this week, which begs the question of what unemployment figures will look like in Q4 and if this will lead to a cliff-edge effect in the labour market recovery.

EUR

The centre-left Social Democrats party SPD narrowly defeated the ruling CDU/CSU bloc in Sunday's elections, as the exit polls showed yesterday, which means the parties will support the Greens and pro-business FDP to form a coalition. While the prospect of a Traffic Light coalition (SPD, Greens, FDP) is less fiscally expansive than e.g. a Left coalition, it will be a vast difference from Germany's last 16 years of governance and should support Germany's economic growth more robustly. As expected, the FX reaction to the news was muted given that uncertainties remain plentiful as difficult and lengthy coalition negotiations lie ahead. Chancellor Angela Merkel is expected to remain in power for at least most of next quarter, and until markets are given more insight on what the coalition will look like and what the parties agree on, Germany remains in political limbo. On the monetary front, European Central Bank President Christine Lagarde's optimism yesterday was in line with the decision by the central bank to start reducing asset purchases under the pandemic QE programme as of next quarter. Lagarde reiterated the ECB's stance on inflation and stated current inflationary pressures are of transitory nature. With Sintra kicking off today - an event packed with central bank speeches and discussions - euro traders will keep an eye out for further comments around the economic outlook.

USD

What was going to be an intense legislative week for the dollar turned into full Fed focus after two Federal Reserve members resigned in less than 12 hours time. Dallas Chief Robert Kaplan quit just hours after his colleague Eric Rosengren stepped down in the wake of disclosures about their trading activities. While Kaplan was not a voting member this year or next, Rosengren's successor will be a voter in 2022. In total, six out of 19 members in the FOMC could be replaced in the coming months. Beyond the resignations, headlines focusing around the Fed included comments from Powell, Brainard, and Williams, who all reinforced the message that although the start of QE tapering is looming, markets should not take this as a signal about a timing of liftoff. While this could be taken as dovish by itself, markets took this as a hawkish signal in last week's Fed meeting as this would leave a half year gap between the expected end of QE and the first expected rate hike, increasing chances of earlier surprise hikes if the data allows for this. The dollar continued to creep higher overnight, ahead of the heavy slate of speakers due in the session today, including FOMC Chair Powell and members Evans, Bowman and Bostic.

CAD

The Canadian dollar led gains along with AUD in the G10 space yesterday as commodity prices rose across the board. The loonie closed the session out yesterday at the top of its recent range, while a minor retracement occurs this morning despite an extension in WTI above $76 per barrel. The commodities market remains in focus as analysts revise up price targets and concerns linger that the industry isn't investing enough in maintaining supply in fossil fuels.

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