US equity markets stabilized yesterday following the tumultuous start to the week and the Dow Jones closed largely flat on the day whilst the S&P 500 fell around 0.5%. US Treasury yields resumed their upward trend and the US 10y jumped back above 2.80% after US Senate leaders reached a bipartisan agreement to increase spending by almost $300bn over the next two years.
Rising US Treasury yields helped support USD which outperformed on the day whilst CNY fell after Chinese data showed a shrinking current account surplus amid a jump in imports.
GBPUSD traded back below 1.3900 yesterday in line with the broad-based USD strength seen across FX markets. Given no political developments or significant UK data releases, GBPUSD gyrations have almost exclusively been driven by USD sentiment this week but GBP should garner more attention today amid the BoE meeting and Inflation Report at noon.
In Germany, the SPD and the CDU reached a Grand Coalition agreement but the announcement had little impact on FX markets even though it should be EUR positive. SPD members will vote on the proposal and the results will be released on 4th March – the same day as the Italian elections.
Elsewhere, the central bank of Brazil cut the Selic rate 25bp and announced the end of the easing cycle as inflation is converging to target. The RBI and the RBNZ kept policy unchanged as expected.
Focus today will be on the BoE meeting interest rate decision and inflation report at noon. Barclays Research expects the bank to “…remain in wait-and-see mode and refrain from revising its communication in the absence of relevant events or data since its last inflation report...”.
In addition, Barclays Research maintains its call for a 25bps hike in November whilst market pricing implies at least one hike by November with a c.55% chance of a hike already in May.