Risk assets have started the week well with equities rising yesterday in Europe and the US while Chinese markets are closed for the whole week. The dollar remained moderately strong. It’s become increasingly clear that larger swings in the dollar are now driven by data releases given the market's heightened sensitivity to the US growth story ahead of next week’s Federal Open Market Committee (FOMC) meeting. Preliminary PMIs will be released across developed markets today, and despite the surveys not being as highly regarded as the ISM in the US, that elevated sensitivity to data likely makes today’s releases a risk event for the dollar. Consensus expectations are centred around a modest recovery in the service index and in the composite survey. Some improvement in the market’s sentiment around the health of the service sector in the US should help limit downside exposure for the dollar.
The Bank of Canada meets tomorrow. The market favors a quarter-point hike. That would lift the target rate to 4.50% and is seen as the terminal rate. The Bank of Canada need not be definitive and is more likely to frame it as a pause. Still, notably, the market has a quarter point hike discounted by the late October meeting and another one by year-end. The year-end target rate is seen at 4.0%. Yesterday, StatsCan reported that the new house price index stabilized in December after drifting lower for the previous three months. The US dollar is little changed against the Canadian dollar this morning near 1.3370. It is trading in a narrow range (1.3345-1.3385) and holding above yesterday's low 1.3340. Observe the USD/CAD trends.
EUR/USD has gone through an impressive reversal of fortune of late, appreciating 11% in the last three months. A key driver of the reversal has been the steady stream of better- than-expected Eurozone data that coincided with a gradual data deterioration out of the US. Investors have gone from worrying about a deep recession in Europe to positioning for a US growth downturn. This further means that while the hawkish ECB rhetoric has gained credibility, the credibility of the Fed’s hawkish communication has been eroded. Today focus will be on the preliminary January PMIs out of the Eurozone and the US. The market consensus is for further improvement of business sentiment on both sides of the Atlantic. That said, the PMI recovery could corroborate the expectations that a recession in Europe would be avoided while the data could keep investors worrying about a US recession.
The GBP has had a fairly promising start to 2023, although it ended up trailing the rest of the G10 FX bloc yesterday. The GBP is likely continuing to be weighed by the grim December UK retail sales report. Today the UK agenda picks up as well, with the latest government borrowing figures and several leading surveys for January. The flash PMIs are likely to attract most of the attention today especially if last month’s tentative recovery in the composite index proved to be short-lived, suggesting that activity could have contracted at the start of 2023.Markets are also strengthening the case for a dovish rate hike from the BoE next week.
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