Tighter trading ranges seem warranted after a very eventful week that culminated with surprisingly strong Nonfarm Payroll (NFP) numbers, and a lack of market-moving data releases (nor Fed speakers). Markets await Thursday’s consumer price index (CPI) figures for further direction. The US calendar includes the NFIB Small Business Sentiment index today, which is expected to have dropped in January, but the release should not have any major market impact. Geopolitical tensions in Ukraine/Russia remain a key theme to watch, global markets appear more reluctant to price back in any geopolitical risk premium into the currency market. We think that Friday’s payrolls numbers have helped build a floor under the dollar as markets should continue to cement their hawkish views on Fed tightening into the March meeting.
USD/CAD has wiped its Friday’s gains when a stark divergence between US and Canadian jobs figures for January drove the pair close to 1.2800. We think that markets are currently weighing the fundamental picture for the loonie, finding it still attractive, especially considering recent CAD underperformance. Indeed, Friday’s figures were very grim, as employment dropped by 200k and the jobless rate spiked to 6.5%. However, Canada’s labor market has shown a unique ability to rebound from lockdown-induced slack, and the latest Bank of Canada Business surveys indicating still record high hiring intentions suggest there should be a solid base for recovery. We doubt that the Bank of Canada’s tightening plans have been derailed by January’s jobs data, and we forecast six 25bp increases by the end of 2022. This should offer support to the loonie down the road: for now, we expect USD/CAD to stabilize around 1.2600.
Euro / US dollar (EUR/USD) appears glued around the center of the 1.13-1.15 range at the start of this week, showing some very moderate pull-back after the European Central Bank meeting and US payrolls last week. Interestingly, the euro (as well as ECB rate expectations) has not appeared too reactive to post-meeting ECB speakers’ remarks. Yesterday, President Christine Lagarde took a chance to implicitly push back against the market’s aggressive pricing on ECB tightening, stressing how the policy shift will be gradual. Most expect the EUR/USD to consolidate around 1.13-1.15 in the medium term.
Except for the non-market-moving political turmoil in the UK, there are no other events or data releases to report on the GBP side today. Tomorrow and on Thursday, we’ll hear from the Bank of England’s Chief Economist Huw Pill and from Governor Andrew Bailey, and Friday will see the release of growth data. But for now, GBP may trade mostly range-bound.
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