Investors' attention has remained firmly focused on geopolitical issues, with markets seeing few signs that tensions in Ukraine are easing. Equities are still in a precarious position, as they must contend with the now-imminent potential of Fed tightening, which is a major subject today as the FOMC releases its monetary policy statement. The early termination of QE asset purchases is widely expected to be revealed today. From a market standpoint, this might encourage speculation that the Fed would prefer to let the balance sheet reduction do the heavy lifting, leading to a dovish repricing of tightening expectations. The combination of geopolitical risk and hawkish Fed predictions is expected to trigger some dramatic swings in the markets this afternoon.
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Most expect the Bank of Canada to hike the policy rate by 25 bps today as tightness in the jobs market and high inflation warrant a start of the tightening cycle. A hike is around 70% priced in by the futures market, implying some upside potential for the loonie if the BoC does truly begin its tightening cycle. A CAD-positive BoC meeting combined with a USD-negative Fed meeting might push USD/CAD back to the 1.2500 support level. Any further escalation of geopolitical tensions and/or equities weakness will work against any CAD appreciation.
This week, the EUR/USD has been lingering around 1.1300, with the currency under pressure due to a strong dollar and negative exposure to the Ukraine issue. The EUR's short-term outlook will be influenced by the consequences of upcoming sanctions against Russia on EU-Russia ties. The EUR will continue to be dragged down by Ukraine tensions until these implications are clarified. For the time being, any dollar weakness following the Fed statement may not be enough to increase EUR/USD much.
Prime Minister Boris Johnson's position appears to be even more jeopardized after reports of another party during the lockdown surfaced, and the British police announced a formal inquiry into events that occurred in the PM's office during the outbreak. While most Conservative MPs have agreed to wait for the outcome of the investigations before voting to remove Johnson, there appears to be a growing consensus that his term is coming to an end. Given no obvious implications for the UK economy or the Brexit stance for the moment, any change at the helm of the government should have a limited impact on the pound.
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