The Asian session started with risk-off trading on the back of the missile strike inside Poland, which gave the USD support. Later in the session, US President Joe Biden said the missile was unlikely fired by Russia, which soothed investors nerves and led to the USD giving back some gains and equity markets recovering a little. Biden’s words also gave the EUR a boost. S&P500 futures were trading in the red. Soft US PPI data and investor hopes of a less hawkish FOMC are restraining the USD upside at this time. The EUR and USD were the outperformers in G10 FX during the overnight session.
The downside surprise in US CPI data last week spurred a dip in USD/CAD towards 1.32 for the first time in nearly two months. While the pair has since stabilized near these recent lows, the move in FX has interestingly come at odds with the lack of adjustment in the rates space, as in particular, the 2Y US-Canada yield spread has held up steady close to 50bp. Nearly a week after the US, Statistics Canada is due to release its own CPI figures for October which are expected to show steady headline and core inflation as per both the market expectations and the BoC’s forecasts. Barring any major deviation from this scenario, both the CAD and interest rate differentials could hardly be moved as the BoC already enacted smaller tightening steps. As it stands, rate spreads could struggle to regain much driving power over the near-term course of the CAD, which could ultimately still rely on superior terms of trade to recoup some ground in the longer run.
Price action remains quite choppy for the GBP which outperformed its G10 FX peers yesterday, as of special note GBP/USD hit 1.20 for the first time in nearly three months. Not that the latest UK jobs data proved particularly upbeat, as in particular UK wages growth continues to lag far behind inflation. This could be further confirmed by today’s CPI figures for October, which are poised to register a sharp monthly leap as households faced higher energy bills after the latest uplift in the energy price cap. Barring any massive surprise in today’s release, the market is unlikely to draw any far-reaching conclusion on the UK inflation outlook into 2023 as amongst the flurry of fiscal announcements tomorrow’s Autumn Statement is to bring some clarification on the fate of the energy price cap past April. As long as the UK government maintains some sorts of predictable support on that front, the market could refrain from calling for a greater tightening effort from the BoE.