The rebound in global equities has continued to fuel a recovery in FX, and a correction in the safe-haven US dollar. Clearly, the monetary policy story is playing a secondary role in the market narrative at the moment, but yesterday’s comments by Fed Chair Powell were quite relevant from a signalling perspective, as he firmly reiterated the Fed’s determination to bring inflation sustainably lower, even by hiking beyond the neutral rate if necessary. While the dollar momentum is set to remain weak as long as global assets stay in recovery mode, the notion of aggressive Fed tightening continues to argue against a sustained bearish dollar trend. The US economic calendar includes some housing data today, and Patrick Harker is the only Fed speaker scheduled.
Inflation data will be released in Canada today, and the market is expecting some signs that the headline rate has peaked at 6.7% YoY. Barring major surprises in the data today, we suspect that the impact on the Bank of Canada's rate expectations and on the Canadian dollar will be limited. The BoC remains on track to deliver 50bp of rate increases in tandem with the Fed, being able to count on a tight labour market, growing workforce and positive commodity story. In our view, the BoC will ultimately have to deliver more monetary tightening than the Fed in the next year. We continue to target sub-1.25 levels in USD/CAD by the second half of the year.
EUR/USD has risen in line with other pro-cyclical pairs this week, breaking back above the 1.0500 level and now being at a safe distance from the key 2017-low support of 1.0340, which if breached would probably pave the way for a move towards parity. Today, the eurozone calendar is not busy and only includes the final print of April’s CPI numbers. EUR/USD may start to lose steam around the 1.0650-1.0700 area, with risks of a return below 1.0500 in the near term being quite material.
This morning’s inflation report in the UK was broadly in line with consensus expectations, as headline CPI rose to 9.0%. This means inflation is largely where the Bank of England expects it to be. The BoE projections embed a move to double-digit inflation by the end of the year, a prospect that we are still not convinced will materialize. The pound has faced a strong rebound this week, recouping some of its recent sharp losses as global risk appetite improved. GBP momentum may continue as equities find some stability in the coming days, the pound still faces two major downside risks in the coming months: a) a further dovish repricing of BoE rate expectations; b) Brexit-related risk, as the unilateral suspension by the UK of parts of the Northern Ireland agreement would likely trigger a trade war with the EU. We think GBP/USD will mostly trade below the 1.2500 mark during the summer.