GBP/USD dives back closer to YTD low, around 1.2160 area amid broad-based USD strength

GBP/USD witnessed selling for the fourth straight day and dropped back closer to the YTD low.

Disappointing UK macro data fueled recession fears and weighed heavily on the British pound.

Aggressive Fed rate hike bets and the risk-off mood benefitted the USD and added to the selling.

The GBP/USD pair added to its heavy intraday losses and weakened further below the 1.2200 round-figure mark heading into the North American session. The pair was last seen trading around the 1.2160-1.2165 region, just a few pips above the YTD low touched on May 12.

The monthly UK GDP report released earlier this month showed that the economy contracted by 0.3% in April, marking the first 

back-to-back decline since the start of the coronavirus pandemic. Adding to this, the UK Industrial and Manufacturing Production slumped for the second straight month. The lacklustre macro data fuelled fears that Britain could be headed for a recession and clouded the outlook for the Bank of England. This, along with Brexit woes and UK political jitters, took its toll on the British pound.

In the latest Brexit-related developments, the UK government will publish plans to scrap parts of the post-Brexit deal concerning the Northern Ireland Protocol. This would set the stage for a further deterioration in post-Brexit UK-EU relations and possibly spark a trade war in the middle of the cost-of-living crisis. Apart from this, the uncertainty over Boris Johnson’s future as the UK Prime Minister further undermined sterling and dragged the GBP/USD pair lower for the fourth straight day amid broad-based US dollar strength.

The red-hot US consumer inflation data released on Friday fueled speculations that the Fed would tighten its policy at a faster pace and opened the door for a jumbo 75 bps rate hike. This, in turn, pushed the yield on the 2-year Treasury note - seen as a proxy for the Fed's policy rate - to 3% for the first time since 2008. Adding to this, the yield on the benchmark 10-year US government bond shot to the highest level since 2018 and underpinned the buck.

Meanwhile, the prospects for a more aggressive move by major central banks, along with the worsening global economic outlook, continued weighing heavily on investors' sentiment. This was evident from an extended selloff in the equity markets, which provided an additional boost to the greenback's relative safe-haven status. The combination of factors exerted downward pressure on the GBP/USD pair and took along short-term trading stops near the 1.2200 mark.

Some follow-through selling below the YTD low, around the 1.2155 region would be seen as a fresh trigger for bearish traders and set the stage for additional losses. That said, traders might refrain from placing aggressive bets ahead of the key central bank event risks later this week. The Fed is due to announce its policy decision on Wednesday and the BoE meeting is scheduled on Thursday. The outcome should provide a fresh directional impetus to the GBP/USD pair.

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EUR/USD consolidates in low 1.0700s as traders eye this week’s ECB meeting/US CPI

EUR/USD is trading in calm fashion in the low 1.0700s as traders eye this week’s ECB meeting and US CPI.

A hawkish ECB/easing of US price pressures combo could see the pair push above 1.0800.

EUR/USD is trading just north of flat in the 1.0725 area, in quiet trade ahead of what will ultimately be a busy week for the pair. The European Central Bank (ECB) announces policy in June and is expected to solidify expectations for interest rates going positive by the end of Q3, with traders set to scrutinise President Christine Lagarde’s tone on the prospect of further tightening as markets guage the outlook for 2023. Meanwhile, US Consumer Price Inflation data for May is set for release on Friday and could impact expectations for Fed policy.

But the first three days of the week are set to be much quieter in terms of central bank events and economic data, meaning EUR/USD is likely to take its cue more from things like risk sentiment/geopolitical developments etc. That would suggest that the pair may well remain stuck within recent low-1.0600s to upper-1.0700s ranges, with the 50-Day Moving Average likely to act as a magnet, as has more or less been the case over the past few days.

Some strategists think that the case for a push above 1.0800 and to its highest levels since mid-April is on the cards for EUR/USD later this week/next week, should the ECB come across as hawkish and US inflation show signs of easing. On the latter, growing momentum behind the peak US inflation narrative and, thus, peak Fed hawkishness, has been a major driver of the recent rebound from last month’s lows under 1.0400.

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European Stocks Lower; Russian Gas Move, Bank Earnings in Focus

European stock markets traded largely lower Wednesday, as investors digested ramped up geopolitical tensions, a troubled global growth outlook as well as mixed quarterly corporate earnings.

By 4:05 AM ET (0805 GMT), the DAX in Germany traded 0.3% lower, the CAC 40 in France fell 0.1%, while the U.K.’s FTSE 100 climbed 0.2%.

Tensions over the Russia-Ukraine conflict were heightened Wednesday after Gazprom, Russia's state-owned energy giant, confirmed that it has stopped supplies to Poland and Bulgaria. 

It's the first time that Russia has interrupted supplies to EU members in over 40 years of shipping natural gas, caused crude prices to rise and increased concerns about Europe’s energy security.

Russia is demanding payments for its gas in rubles as sanctions over its invasion of Ukraine bite, something that most western countries are not prepared to comply with as that could undermine the sanctions.

By 4:05 AM ET, U.S. crude futures traded 0.2% higher at $101.86 a barrel, while the Brent contract rose 0.2% to $104.84. Both benchmarks gained around 3% on Tuesday.

European equity indices have also been pressured by worries that China’s insistence on stringent COVID restrictions will harm domestic and global growth as well as the hawkish pivot from the Federal Reserve potentially slowing growth at the world’s largest economy.

These factors resulted in consumer confidence in the euro area’s two biggest economies falling more than anticipated. In Germany, data dropped to an all-time low, while French figures declined to the lowest since 2018.

It’s a big day for earnings in Europe, with the banking sector once more to the fore.

Deutsche Bank (ETR:DBKGn) stock slumped 5.6% after the German lender warned that the Russia-Ukraine conflict could hurt full-year results, saying its funds set aside for credit losses are expected to increase "significantly" this year.

Credit Suisse (SIX:CSGN) stock fell 1.6% after the Swiss bank posted a first-quarter loss along with another set of top management departures. 

By contrast, Lloyds (LON:LLOY) stock rose 2.4% after the U.K. lender lifted its full-year outlook with demand for mortgages holding up even as it warned of the dangers to the British economy from higher inflation. 

Elsewhere, GlaxoSmithKline (NYSE:GSK) stock rose 0.7% after the pharmaceuticals giant beat expectations for its first-quarter results, helped by buoyant sales of its COVID-19 treatment.

Mercedes Benz Group (OTC:DDAIF) stock rose 1.4% after the carmaker confirmed its guidance for the full-year with high prices making up for supply chain troubles, Telia (ST:TELIA) stock advanced 1.1% after the Swedish telecoms operator posted better-than-expected quarterly earnings, and DSV (CSE:DSV) stock climbed 2.7% after the Danish transport company raised its 2022 outlook.

There were also significant earnings after Tuesday’s close on Wall Street, with Google parent Alphabet (NASDAQ:GOOGL) reporting first-quarter revenue below expectations, while software giant Microsoft (NASDAQ:MSFT) forecast double-digit revenue growth for its next fiscal year.

There are more significant U.S. earnings releases Wednesday from companies such as Meta Platforms (NASDAQ:FB), T-Mobile (NASDAQ:TMUS), and Boeing (NYSE:BA).

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Russian companies, banks could reap windfall from depositary receipt delisting

Russian companies and global banks including BNY Mellon (NYSE:BK), Deutsche Bank (ETR:DBKGn), Citigroup (NYSE:C) and JPMorgan (NYSE:JPM) could profit if Moscow moves to de-list Russian companies' depositary receipts from foreign exchanges, according to two people familiar with the matter.

The potential windfall is due to the fees that bank issuers of depositary receipts can contractually charge investors when they cancel the product.

It is unclear how much companies and banks could make or if banks will charge the fees and risk angering investors who say it would be unfair given the extraordinary circumstances which have been triggered by Russia's invasion of Ukraine.

However, the fees could potentially translate into hundreds of millions of dollars according to Reuters' calculations based on fee data provided by the sources.

Assailed by Western sanctions, Moscow is preparing to de-list Russian company depositary receipts from foreign exchanges and convert them into local Russian securities in a bid to reduce foreigners' control over these companies.

Depositary receipts are certificates issued by a bank representing shares in a foreign company traded on a local stock exchange. They allow investors to dabble in overseas stocks in their own geography and time zone.

There are more than 30 depositary receipts on Russian companies including Gazprom (MCX:GAZP), Rosneft, Lukoil and Norilsk Nickel issued by BNY Mellon, Deutsche Bank, Citigroup, JPMorgan, among others, trading on U.S. and European markets.

Under standard agreements, depositary receipts can be canceled by the issuer or the investor. When that happens, the investor typically gets cash from the sale of the underlying shares, although they have the right to take custody of the shares instead.

Banks charge an administration fee, typically around $0.05 per receipt, which may be shared with the companies, two sources said.

If Moscow de-lists Russian depositary receipts, banks will have to cancel the products. Banks could still charge the fees, even though their hand was forced, according to three sources.

For example, an investor in Rosneft with 150 million depositary receipts representing the same number of shares in the company could be on the hook for $7.5 million in cancellation fees, according to Reuters' calculations.

Sweeping Western sanctions could make it challenging for banks to transfer the cash to some companies.

Regardless, some investors say the fees should not apply. One global asset manager told Reuters that if Russia passes the de-listing law there should be no fees as investors would have no choice in the matter. The other two sources, however, say banks still have to cover their costs.

BNY Mellon, Deutsche Bank, JPMorgan and Citigroup declined to comment. Russian companies did not respond to a Reuters emails seeking comment.

MARKET FREEZE

As Western sanctions pummeled Russian stocks from late February, the Moscow exchange closed and the Russian central bank banned foreigners from transferring shares out of their custody accounts. It also barred foreigners from selling Russian shares.

The restrictions made it nearly impossible for banks to cancel receipts when asked by investors anxious to slash their Russia exposure.

With curbs on custodians recently lifted, BNY Mellon, Citi and JPMorgan have resumed processing cancellations. But because the foreign banks still can't sell the shares, investors have to take custody of them instead. To do that, investors need an account in Russia, which many don't have.

As a result, a lot of investors are likely to hold onto the receipts for the time being, according to three people.

Many investors are worried, however, about the de-listing bill which Russia is preparing.

Aside from the potential cancellation fees, investors are worried about what will happen if they can't open a local custody account.

In a note to clients, JPMorgan said clients may be able to open a Russian account under some unspecified circumstances if the new law is passed.

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