Daily Currency Update

USD - US Dollar

The days leading up to today’s FOMC announcement have been rather tumultuous in markets. The emergency takeover by JP Morgan of the collapsing First Republic Bank did not send excessively negative shockwaves across risk assets, but US regional banks have remained under substantial pressure. All this clearly matters for the Fed as it announces monetary policy today. Market consensus suggests a 25bp rate hike which should mark the end of this hiking cycle as the Fed may rely on the impact of financial conditions deriving from the recent banking crisis to deliver the final bit of tightening.  We also have some important data to watch today in the US. The ISM services index will be published four hours before the FOMC statement and is expected to have marginally rebounded after March’s drop to 51.2. ADP employment figures will also be monitored (consensus +145k) ahead of Friday’s official payrolls.

CAD - Canadian Dollar

In the face of declining stocks and oil prices yesterday, the Canadian dollar underperformed. Despite the fact that there hasn't been any action taken today, the US dollar is still strong and is holding above CAD1.3600. Commodity FX is underperforming somewhat on the session. The AUD is the only major currency that is registering a loss on the weak USD on the day so far after it failed to hold much of the gains made on the surprise RBA hike Tuesday.  The CAD still largely trades in the shadow of the USD, although it might find some support today if the FOMC does take a more dovish turn. After widening in late April, short-term US/Canada spreads have moderately reduced in favor of the CAD; this could assist limit the potential for CAD losses. The next upside target is the CAD1.3700-30 area. Observe the USD/CAD trends.

EUR - Euro

Yesterday’s eurozone CPI estimates (for April) came in largely in line with consensus, showing a marginal tick-up in headline inflation from 6.9% to 7.0%. Ultimately, the figures have not convinced markets to make any amendments to the consensus European Central Bank call for tomorrow. Most expect a 25bp “compromise” hike, paired with some hints that more increases are on the way. Today, it will all be about news from the other side of the Atlantic: first US data, then the Fed announcement. We think EUR/USD should face some downside risks today, even though our base case is that it should enter tomorrow’s ECB meeting close to the 1.1000 handle.

GBP - British Pound

The pound will be entirely driven by external factors this week. Today, the Fed may not have a sizeable impact on the pound, and leave it close to the 1.2500 mark. We don’t see a high chance of last week’s highs (1.2580) being tested again very soon. There are no Bank of England speakers due to the quiet period ahead of next week’s policy meeting.