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Markets are off to a cautious start this week, with European stocks slightly up and bonds firmer after the S&P 500 reached new highs. US 10-year yields have slightly decreased, and while the US dollar (DXY) has been consolidating gains from early February, it showed some weakness last week. The dollar remains supported, especially around the 104 level, despite appearing overvalued compared to short-term fair value, as US yields haven't risen significantly. The dollar's near-term direction will likely depend on the US CPI report for January, where slower inflation could limit the dollar's strength, while persistent inflation may support it against market expectations of Federal Reserve easing.
The CAD is little changed, despite strong job data on Friday, which was mainly driven by part-time employment. While high wages prevent markets from expecting significant Bank of Canada (BoC) rate cuts, there's still anticipation of around 21bps easing by mid-year. For the BoC to consider rate reductions, it would require consistent signs of a cooling labor market and wage growth, indicating sustainable inflation control. Currently, swaps predict slightly over 75bps of BoC easing by year-end, compared to the Federal Reserve's expected 112bps cuts. Narrower short-term US/Canada interest rate differences should slightly benefit the CAD, as should record-high US stocks. Observe USD/CAD trends.
The Euro (EUR) has slightly retreated from its early session peaks, remaining relatively stable overall. ECB official Panetta suggested that rate cuts might be nearing, contrasting with more cautious views from other ECB members like Holzmann. Moderate rate reductions from mid-year are still highly likely. Recent attention on the German commercial real estate market led Finance Minister Lindner to describe it as undergoing an "adjustment period."
Sterling has mirrored the Euro's movements today, with no significant UK data released. However, upcoming employment, CPI, and GDP reports this week are expected to influence the pound's short-term trajectory, potentially leading to volatility.
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