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Pace of Fed and BoC tightening will continue to play a major role in currency direction

USD - US Dollar

Despite increasing speculation around five Fed hikes in 2022, the dollar did not manage to hold on to last week’s gains. Yesterday’s move was likely just a position-squaring event, as the pace and size of the tightening cycle after last week’s FOMC is offering very few obstacles to USD positive speculation on Fed policy. In the US calendar, the highlights of the day are the ISM manufacturing numbers for January and JOLTS jobs opening for December. The FX impact should be contained, and barring a major slump in the ISM figures, the notion that the Omicron impact on US activity has been fairly contained should remain intact.  

CAD - Canadian Dollar

The CAD continues to trade just under the 1.27 level to start the trading day. Risk appetite remains cautious and while market sentiment remains an important influence on the CAD’s performance. Market disappointment after the Boc’s decision to stand pat last week is likely the biggest drag on the CAD right now. Governor Macklem will address the Senate Wednesday on monetary policy. Market expectations continue to suggest that rates will rise relatively quickly from March. In the short term, the CAD will be tied to commodity prices which will need to improve significantly for the CAD to rally in the short term.

EUR - Euro

The EUR seemed to have some support being paired with the generalized dollar weakness yesterday, as evidence that prices in the eurozone are stickier than expected fuelled speculation on a 2022 start to the ECB tightening cycle. Higher yields in the region may continue to offer a floor to the euro heading into the ECB meeting on Thursday. This also raises the bar for a hawkish surprise ahead of the announcement though it is likely that President Lagarde will stir well away from signaling a rate hike in 2022. Employment data in the eurozone today should not have any impact on the currency with the EUR/USD likely to trade well above 1.1200 before Thursday’s ECB announcement.   

GBP - British Pound

The political storm around PM Boris Johnson has continued to intensify as the report on “party-gate” was released yesterday and British police are investigating a number of gatherings that took place during the lockdown period. Most doubt this is behind yesterday’s GBP volatility.  After all, political risk has been (and should continue to be) a non-factor for the currency market. The prospect of BoE hiking on Thursday should keep the appetite for the pound quite elevated.  

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