In the near term, the USD should remain supported by the relative outperformance of the US economy that will allow the Fed to normalize policy more quickly. The USD should further benefit from its role as a liquid safe -haven currency during recurrent bouts of risk aversion. Medium-term, we expect the US economic outperformance to become less pronounced and the Fed to embark on gradual policy normalisation, which could keep US real rates and yields negative. This, coupled with central bank tightening outside of the US, could encourage diversification flows out of the USD, especially given lingering concerns about the US twin deficits and the USD’s overvaluation. For today's session, we have some US April PMIs, though we suspect that the market is far more interested in price than activity data right now.
Headlines from Macklem who suggested that inflation is slowing down forced the CAD to have a kneejerk from the 1.25’s to the 1.26’s. Most analysts didn’t think that comments by Macklem justified lower CAD. Macklem highlighted that BoC outlook for inflation is that inflation is slowing down, and it may be time to pause so that they don’t over-slow the economy. Though we are starting the day north of 1.2650, we continue to expect further and after tightening by the BoC compared to the Fed in H122. Some gradual CAD outperformance could thus tentatively resume over the USD.
The euro has failed to find much lasting support from an increasingly hawkish set of commentary emerging from the European Central Bank this week. The problem is that rates lift-off from the ECB this year looks to be overshadowed by aggressive tightening cycles from elsewhere. For today, look out for the April PMIs across the eurozone. French business confidence actually held up pretty well when it was released yesterday. We favor EUR/USD continuing to trade heavily near the 1.08 area - and any deterioration in the risk environment will generally see the dollar favoured.
The Bank of England's (BoE's) Catherine Mann put a twist in the plot yesterday by suggesting the BoE could accelerate its pace of tightening if the economy withstood the cost of living crisis. Today's soft UK March retail sales release is a notch against such an outcome. The GBP also faces some political risks again where the Financial Times today reports that the UK is (yet again) threatening to rip up parts of the Northern Ireland protocol, agreed as part of the Brexit deal. Markets have come to ignore this, although it could add to some downside risks to the GBP – possibly around 1.2850.
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