The focus will start to shift to the NFP release tomorrow and keep trade on the quiet side. Overnight price action has been shaped by news that the US is considering a significant release from the SPR to ease pressure on domestic energy prices (reports suggest 180mn barrels—of around 565mn in total— may be released over 180 days). Other countries may also announce releases from reserves but the decision rather suggests no additional supply is coming from OPEC+ in the coming months (the cartel announces supply plans today). The move may offset disrupted Russian supply (4-5mn bpd exported pre-war) to some extent but a sustained decline in energy prices seems unlikely. Crude oil has dropped sharply on the headlines, however, and bonds have perked up. Asian stocks weakened (China’s PMIs dipped back under 50 in Mar, before the impact of lockdowns was fully apparent), European markets have softened while US equity futures are flat. The NOK dropped sharply on the SPR report and commodity FX generally has underperformed, with the exception of the MXN which retains a relatively firm tone by holding little changed against the USD. We remain constructive on the USD generally and look for the base which appears to be developing around 97.80 in the DXY to provide a platform for the index to pick up in the short run; another positive US jobs (and wages) report tomorrow should bolster USD gains.
The GBP’s underperformance among the majors for the week stopped overnight with the pound leading most of its peers thanks to holding unchanged on the day as it manages to hold on to a 1.31 handle. Barring a positive 0.3ppts revision to UK Q4 GDP growth to 1.3% q/q, there have been limited GBP drivers overnight—and the data had no obvious impact on price action. A steep widening of US-UK yield differentials has been weighing on the pound through the better part of the past two months and we see limited odds of a significant narrowing of the GBP’s yield disadvantage. After sitting around 0bps in early-Feb, the 2-yr USTgilts spread has now fallen by roughly 100bps with hawkish Fed expectations building. BoE hike bets had managed to keep pace with Fed pricing until the BoE’s cautious hike in mid-March. Since the bank’s decision, OIS pricing has added almost two more full Fed hikes versus only about two-thirds of one in the UK. With a quiet data and events calendar ahead meaning that there is little to rebuild BoE expectations on next week, we may see further GBP weakness in the coming days; speeches by Bailey
