For today, the US data calendar is quiet apart from the March PPI figure. The dollar yesterday was a little weaker on some softness in core US CPI. It will be a slow descent for inflation and should not prevent the Fed from taking the funds rate to 3% early next year. DXY is to consolidate above 100 and could enjoy some gains in the short term.
Strong growth, tight labour markets, and above-target inflation should see the Bank of Canada (BoC) hike 50bp today to 1.00%. The focus will also be on what BoC does with its balance sheet, where it could potentially announce some faster quantitative tightening (QT). Any end of reinvesting maturing bonds could see the BoC balance sheet shrink quickly over the next couple of years. USD/CAD has already retraced 50% of the March drop to 1.2400, and even if we were to see a temporary spike in USD/CAD to the 1.2700 area, we suspect plenty of CAD buyers would return. Healthy terms of trade gains on the back of the commodity shock leave the CAD well positioned in the medium term with a target of around 1.20-1.23 as the year progresses.
Were it not for some more bearish headlines emerging out of Ukraine yesterday afternoon, EUR/USD would probably be trading closer to 1.09 now. As it is, expectations of increased hostility in Eastern Ukraine, more sanctions against Russia, and higher energy prices are all keeping the euro on the back foot. We doubt investors are yet ready to push EUR/$ below 1.0800 so shortly ahead of tomorrow's ECB meeting. We feel that front-loaded Fed tightening is a dollar positive (we have the Fed hiking 50bp in May, June and July) meaning that EUR/USD could well be approaching 1.05 this summer.
Today's broad-based upside surprise in March UK CPI looks set to keep aggressive Bank of England tightening expectations in place for a little longer and keep GBP supported. Today's UK inflation data suggests CPI could be peaking in the 8.5% area in April and could bring back expectations that the BoE hikes by 50bp in May – currently a 28bp hike is priced.
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