Yesterday retail sales and industrial production came in softer than expected, triggering another round of dovish repricing in Federal Reserve rate expectations. Markets are now pricing in factors that suggest that the Fed may stop hiking after a 25bp move in February. One could argue that the dollar is facing a rather uniquely timed combination of negative factors, however, a straight-lined dollar depreciation in the first quarter is far from assured. Global and US-specific dynamics continue to suggest a bearish bias on the dollar in the near term. Today, markets will watch the size of the increase in initial jobs claims, as well as housing data and the Philadelphia Fed survey. The Fed’s Susan Collins, Lael Brainard and John Williams are scheduled to speak.
The risk-off mood is taking a toll on the Canadian dollar. The greenback posted an up day yesterday against the Canadian dollar but has recovered to 1.3500 after setting a low near CAD1.3350. Follow-through buying today has lifted it to 1.3520. Price action highlights the fact that even though FX/equity correlations have weakened in the past few weeks, the CAD’s relationship with the S&P 500 remains highly relevant. Weak stocks suggest limited potential for the CAD to recover at the moment. Observe the USD/CAD trends.
Yesterday, ECB Governing Council member Francois Villeroy explicitly pushed back against recent reports suggesting a switch to 25bp increases and said that President Christine Lagarde’s 50bp guidance remains valid. Lagarde herself will speak in Davos today, and there is a good chance she will reiterate the ECB’s hawkish stance despite lower energy prices. We expect to see some consolidation/further upside in EUR/USD by the end of the week when the pair could trade around 1.0850/1.0900.
The leader of the opposition Labour Party, Keir Starmer, is reported to deliver a rather conciliatory speech in Davos today about the future of EU-UK relationships. In an interview with the Financial Times, Starmer criticized the Brexit deal and said he aims to rebuild good trade relationships with the bloc. The Labour party is leading by a rather large margin in the latest opinion polls ahead of next year’s general elections and evidence of a softer stance on Brexit should benefit the pound in the long run. Today, there are no events or data releases in the UK.
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