Daily Brief

French elections and the ECB put the single currency in focus

It is Macron and Le Pen again then….

Emmanuel Macron won the first round of the French election, gaining 27.6% of the vote (after 97% of results counted). Marine Le Pen received 23.41%, and the pair will now face each other in the final round showdown. The news of Macron having the edge gave the single currency a lift in early Asian trading overnight, with EUR/USD popping up to 1.0950 at one point, before settling back. GBP/EUR slipped lower in tandem, but found some friendly support near 1.1900.

 

No change, but are big changes afoot by the ECB?

This week’s ECB meeting is likely to offer a similar result on rates as every other ECB meeting since September 2019, that is the ECB to remain on hold at -0.5%, and continuing with their recent guidance to end APP during Q3. However, and it is a big however this time, the post-meeting conference really is the bit to watch. Madame Lagarde is likely to tweak her language to give the ECB optionality of raising rates at an earlier date, to deal with that dreaded inflation problem.

 

Markets think the ECB will hike, even if the ECB don’t yet

This may not sound like much, but when you consider that Lagarde had herself said that a 2022 ECB rate hike was unlikely just a few months ago, it shows you just how concerned the powers that be at the ECB are with inflation, and how quickly the landscape has altered. Looking across the board, many Banks are now calling for at least 2 rate hikes from the ECB, with one in September and another just in time for Christmas. Market pricing currently reflects about 60bps worth of hikes, so markets have already moved to reflect the change in stance, and markets always tend to be ahead of the curve when it comes to rates.

 

It is not just about the ECB this week though.

The Bank of Canada could be on the verge of raising Canadian rates by 0.5% to 1%, when they meet this Wednesday. Although Friday’s March employment report saw 72.5k gains versus 80k expected on the headline, the overall unemployment rate dropped to 5.3%, and the rest of the report was strong. Unemployment is now at its lowest level in Canada since the mid-1970’s. With a strong economy, high Oil prices and the lofty inflation levels, the scene looks set for the BoC to raise by 50bps.

USD/CAD will be impacted by the BoC’s actions, and despite reaching a new yearly low at 1.2400 last week, the Loonie succumbed to that stronger greenback, and rallied nearly 200 pips from the lows by Friday’s close.

 

GBP/USD breaks below 1.3000

After remaining glued to the 1.3100 region for much of last week, GBP/USD finally broke below the support, and promptly but rather briefly, traded below the key 1.3000 level for the first time since November 2020. That move was entirely about the USD side of the pair, however, with those hawkish sounding Fed members and March minutes prepping markets for a potential 50bps rate hike in the U.S come early May.

GBP/USD may take its directional bias from the UK side of the pair this week, however, and on that note, we have already seen a raft of UK data released this morning. Of note, the UK economy expanded at a slower pace than expected during February, with real GDP up 0.1%, versus 0.3% expected. Manufacturing and Industrial Production dropped by 0.4% and 0.6% respectively.

The Fed’s Williams is the solitary speaker of note today. Japan’s Bank Lending and PPI for March is set for release at just before midnight.

 

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