Despite geopolitical challenges to the East, it has been a quiet start to the week for FX markets. The next clear catalyst on the agenda today is a speech by Fed Chair Powell discussing the economy and the labor market. This comes at a time when:
i) Inflation staying high.
ii) Central banks are staying hawkish.
We would say that Chair Powell has recently shown to be at the more hawkish end of the spectrum and that today’s event risk should be positive one for the dollar. We think the macro environment continues to favor the dollar and see Powell’s speech, the October PCE price data (Thursday) and November jobs data (Friday) as upside risks to the dollar.
The Canadian dollar fell yesterday for the third consecutive session. It is easily the worst G10 performer, falling 1.6%, while all the other currencies appreciated. Yesterday's losses may have been a surprising given that growth in Q3 was nearly twice as strong as the Bloomberg median forecast. Data over the last few weeks has also exposed the Achilles Heel of the Canadian economy with housing investment contracting at an annualized pace of 15.4%. Retail sales also fell by 0.5% in September, the second decline in three months. USD/CAD is hovering around 1.35 at the time of writing.
Spanish and German inflation came in lower than expected yesterday. The German CPI fell 0.5% to 10.0% in November thanks primarily to lower energy prices. Most analysts remain skeptical that this is the peak, and expect inflation to accelerate again in December. Yesterday’s numbers mean that markets are expecting a lower reading in the eurozone-wide CPI today. The impact on European Central Bank rate expectations has already occurred, as markets have trimmed around 7bp from December pricing, which is now at 54bp. The impact of the inflation story on the EUR/USD has been, predictably, limited. External factors and dollar dynamics continue to drive the pair's performance, and we see downside risks today given that Fed Chair Powell is scheduled to speak later. A break below 1.0300 could bringing EUR/USD back to the 1.0200/1.0250 levels seen earlier this week.
Yesterday’s testimony by Bank of England Governor Andrew Bailey did not yield any market-moving headlines. Today we’ll hear from Chief Economist Huw Pill, who recently pushed back against a 75bp hike and may therefore keep BoE rate expectations in check. The GBP/USD is likely to test 1.1800 as Powell’s speech may support the dollar today
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