King USD has reassessed its dominance in FX markets of late, boosted by growing yields as investors started to price in the prospect of aggressive quantitative tightening as part of the Fed’s policy normalization process in the wake of the release of the March FOMC meeting. The latest tightening of the US and global financial conditions has kept risk sentiment on the defensive and further buffed the appeal of the high-yielding safe-haven USD. Today the US calendar is relatively empty, FX investors could start positioning ahead of next week’s US CPI data and Fed speakers, which could point at more aggressive Fed policy tightening at the May policy meeting. All that being said, with the US rates pricing in full a 50bp rate hike next month and further expecting the Fed funds rate to peak at 3% next year, it seems that many Fed-related positives are in the price of the USD by now.
It has been a wild past few days for USD/CAD as, after falling just short of 1.24 for the first time since November on Tuesday, the pair has reverted back to 1.26. The consolidation in oil prices left the CAD with no fresh catalyst. Today, the publication of the Canadian jobs report for March is unlikely to give the CAD a more potent drive, even if it looks poised for another robust showing. The unemployment rate is expected to fall back to its record lows and average earnings likely experienced further upside pressures. Nevertheless, domestic wages growth could still fall short of the BoC business outlook expectations for the year ahead (5.2% YoY). In that context, the bar for today’s data to eventually overwhelm the BoC or the CAD has seemingly been put quite high, as the BoC already looks set to accelerate its tightening process at Wednesday’s meeting. All in all, the fact that the BoC and the Fed are seen normalizing monetary policy largely in sync should give USD/CAD no specific direction in the near term, while in the longer run we think the CAD is yet to fully reap the benefits of the positive terms-of-trade shock.
The EU took the first real measure against Russian energy exports as it banned Russian coal (as well as trucks and ships) starting from August. The EU imports around 45% of its coal from Russia. The notion that EU countries are starting to accept they'll have to pay a price to hit the Russian energy sector – despite oil and gas remaining away from any ban for now – could contribute to keeping the euro on the back foot in the near term. We continue to see mostly downside risks for EUR/USD, although a break below 1.0800 may not be a story for today. Over the weekend, the first round of the French presidential elections will be a key focus.
Despite the dollar’s good momentum, GBP/USD has been holding above 1.3000, which may prove to be quite solid support for now. After all, the market’s dovish repricing of BoE rate expectations has been relatively contained, and the OIS pricing continues to embed 5+ rate hikes by the end of this year. This is ultimately offering some support to the pound. Today, there are no major data releases in the UK, and external drivers should dominate.
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