The dollar is struggling to find clear direction in the current market environment. Federal Reserve officials continued to push their hawkish rhetoric this week but had to implicitly and explicitly acknowledge more evidence from data must be gathered before debating the size of further tightening. This is essentially leaving the market with one conviction - a 25bp hike in March - and one outstanding doubt about whether that will mark the peak. We suspect key dollar crosses will stay rangebound until the next key data releases. While today’s University of Michigan survey could have some market impact, next week’s CPI is the real risk event. And if the general risk environment proves resilient for another session today, the dollar should still find a floor on the back of some defensive positioning ahead of next week’s inflation data, as happened in the run-up to the Fed meeting.
The latest jobs figures in the US likely raised the bar for a positive surprise in Canada today, even though the consensus is centred on a small increase in the headline hiring figure (+15k). Unlike the Fed, the Bank of Canada has signalled its tightening cycle is probably over, even though it left the door open for more hikes should data argue against the narrative. Markets are pricing little to no chance of further rate hikes, but equally seem reluctant to factor in any rate cuts by year-end. This leaves room on both ends for a pronounced CAD impact from a data surprise today. A weak number could fuel easing bets, while a strong number – paired with the recent revision higher in Fed rate expectations – could encourage markets to contemplate one last hike by the BoC. We still expect USD/CAD to test 1.3000 in the coming months, but the key driver may be USD weakness rather than loonie outperformance. Observe the USD/CAD trends.
A brief rally failed to propel EUR/USD back above 1.0800 yesterday, and the pair may trade in the 1.07-1.08 range until next week’s data offers clearer direction to the dollar. Despite an improved risk environment, below-consensus inflation in Germany yesterday may have made investors more cautious about another EUR rally. The ability of European Central Bank speakers to lift the euro appears diminished. One of the most prominent hawkish voices in the ECB, Isabel Schnabel, will participate in a live Q&A today, although her message on the need for more tightening has already been passed through to asset prices. Pablo Hernandez de Cos is also scheduled to speak today.
The UK published GDP numbers this morning and it's a very tough read. Most, if not all, of that 0.5% contraction can be blamed on. However, the fact that the weakness in the fourth quarter was concentrated in December means the starting point for the first quarter is lower. Next week’s wage figures are what the Bank of England policymakers will watch much more closely as they assess signs of “inflation persistence”. We do not see clear drivers of GBP outperformance in the short term.
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