The Morning Update

The USD weakens, oil prices strengthen, equity markets rally, and US yields rise on improving risk sentiment. Currency markets rebalance as investors continue to keep their powder dry ahead of the congressional testimony from Fed Chair Powell and the ECB policy announcement on Tuesday. Equity markets rose, breaking a two-day selloff as risk sentiment improved. Investors appear to be coming to terms with the prospect of higher US rates for longer, given that data so far implied that the US economy can avoid a recession. Elsewhere, Oil prices extend gains on OPEC's decision to extend output cuts. Bitcoin holds firm after setting a record high on Tuesday. Gold prices were steady after setting a record high on Monday. The Egyptian pound tumbled nearly 50% after the central bank hiked interest rates by 600 bps. In focus today, the UK Budget, US ADP Employment Change, Jolts Job Opening, Fed Chairs 1st of 2 days of testimony, Fed's Beige Book, Feds Daly & Kashkari speeches, and the Bank of Canada interest rate decision & statement will help provide intraday direction to currency markets.

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In other news. Trump dominates Super Tuesday to close in on the Republican nomination (FT). Ukraine is willing to accept restrictions on EU trade as Kyiv seeks to end the dispute with Poland. Hamas vows to press on with Gaza ceasefire talks as humanitarian plight worsens. The Russian oil fleet shifts away from Liberia, & Marshall Island flags amid US sanctions crackdown. France and Moldova will sign a defense pact amid fears of Russian destabilization. Pro-Palestinian group sues Canada over military exports to Israel. BC and Ontario mortgage holders increasingly missed payments in Q4, Equifax says. Nikki Haley is expected to exit the Republican presidential race today (WSJ).

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In currency markets. Currency markets hold within current trading ranges as investors keep their powder dry ahead of Thursday's Fed Chair testimony and the ECB Interest rate announcements. Intraday with a flurry of US data releases, the UK Budget, and the CAD interest rate decision, if we see a print outside expectations, we could see some volatility return to the currency markets. CNY holds steady, while Asian currencies firm by 0.1% on average vs USD. Trading currencies mostly improve as risk sentiment improves, with CHF weakening 0.2%, while SEK is flat, NOK, JPY & NZD firmed by 0.2%, AUD & MXN strengthening 0.3%, and ZAR rallies 0.5% vs USD.

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In commodity markets. Oil prices strengthened by 0.9%, Natural Gas and Wheat prices tumbled by 1.3%, Gold & Silver prices slipped by 0.35%, Copper prices firmed by 0.35%, and Soybean prices were flat.

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CAD holds near 10-week lows vs USD heading into the crucial Bank of Canada interest rate decision and the following statement. The Bank of Canada is expected to keep interest rates on hold for a 5th straight meeting as the prospect of a recession fades, allowing policymakers to be patient to get a more precise read on inflation before they switch to a rate-cutting policy. Economists surveyed by Bloomberg see the BoC's first interest cut happening in June, expecting interest rates to fall back to 3% by the end of 2025. Alongside the BoC interest rate decision & statement, markets will monitor several high-tier US economic releases today, which will help provide intraday direction to the loonie.

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EURCAD continues to edge higher, setting a fresh four-month high as investors continue to favor the euro ahead of the ECB interest rate decision.

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EUR retests 1.0900 as risk sentiment improves, while markets curb their enthusiasm ahead of US data, the Fed's Testimony, and the ECB. The euro is starting to regain popularity among central bank reserve managers and other critical investors with the euro's favorable interest rates and the need to diversify from the USD amid challenging geopolitical conditions. Domestically, Euro retail sales m/m turned positive and beat expectations, while y/y retail sales fell -1% but beat expectations of -1.3%. We expect markets to hold within current ranges ahead of tomorrow's ECB interest rate decision.

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GBPEUR holds steady as investors remain sidelined ahead of the UK Budget and the ECB interest rate decision.

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GBP breaches 1.2700 on UK Budget optimism. The pound strengthens in early trading on a combination of weaker USD and improving optimism ahead of the UK Chancellor Hunt's budget report. The Chancellor is challenged to deliver a crucial pre-election budget with the economy in recession and the opposition party leading the polls by more than 20 points across all national polls. Economists expect Hunt to use a small, modest windfall to deliver tax cuts, announcing a 2 pence cut to National Insurance. Alongside the UK budget, markets will be monitoring a flurry of US economic releases; Thursday's Fed Chair's testimony and the ECB interest rate decision could all help drive direction for the pound this week.