The dollar continues to drift lower, partly encouraged by the Federal Reserve’s recent re-iteration of its plans to keep the policy rate on the floor until 2024. Perhaps forward guidance is working after all. The near-term challenge to this benign dollar decline probably comes from Congress.
US data this week sees December consumer confidence and November personal income and spending data. On the latter, the narrative is building around consumers digging into savings to finance consumption while income declines. Overall, however, we suspect the dollar will continue to drift lower into year-end.
CAD: Data momentum is hard to dent
The Canadian dollar's rally lost some steam after a very strong first half of the month, but USD/CAD looks set to remain in a depreciating trend on the back of USD weakness and still solid CAD fundamentals. Data releases this week (CPI, housing starts) are suggesting that the Canadian economy maintained a good pace of recovery in November, while oil prices continue to be boosted by hopes of a rebound in demand as vaccines are rolled out.
Next week, the highlight in Canada will be October’s growth numbers. A second wave of the virus took a toll on the recovery and the MoM growth rate should have slowed to around 0.4%. Still, we doubt that worse numbers will have a strong impact on CAD considering the positive signals from higher-frequency economic data. USD/CAD is poised to enter the festive break in the 1.26-1.27 region.
EUR/USD trades through 1.20 and the sky didn’t fall
EUR/USD is heading into the final weeks of the year at its highs and the move above 1.20 has not elicited much, if any, response from the European Central Bank. Perhaps calming the ECB are issues such as: i) European equities continue to rise and ii) market-based expectations for eurozone inflation have not been priced lower. If topics such as the US stimulus/budget and Brexit can be resolved over coming days, we’d expect this powerful dollar bear trend to continue carrying EUR/USD towards its next major target of 1.25.
In the week ahead, the scheduled calendar of European events is certainly thinning out quickly and we can perhaps only point to Tuesday’s release of December eurozone confidence (a small decline expected) as a clue to how much broadening lockdowns across Europe are dampening sentiment.
GBP: Almost there …
The UK-EU trade deal remains our base case, despite the very latest newsflow (which translated into a modestly weaker pound today). In our view, plenty of progress has been made already (with the issue of state aid seemingly resolved) and we expect the (rather political) issue of fisheries to be resolved as well.
As we have argued for some time, we perceive the GBP reaction function to the UK-EU trade negotiation outcome as asymmetric, with modest upside in the case of a deal but profound downside in the event of no deal as fairly limited risk premium is currently priced into GBP. It is a very quiet week on the UK data front, with the Brexit negotiations remaining the overwhelming driver of the pound.
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