USD: The Fed announces monetary policy today and consensus suggests no changes in the policy stance, with both rates and QE set to be left unchanged. Also, it is highly unlikely that the FOMC will tweak its lower-for-longer narrative. The market reaction will therefore be mostly driven by any signs that the Bank is shifting towards a more upbeat tone on the economic outlook on the back of vaccine developments and larger fiscal stimulus under the new administration (the IMF just upgraded its forecast for 2021 US growth to 5.1% from 3.1% in October). That may be enough to fuel some speculation of earlier-than-expected tapering, despite that we expect Chair Powell to keep the policy message firmly on the dovish side. Looking beyond the short term, unless we see a more tangible shift in the Fed’s rhetoric (highly unlikely in the foreseeable future) the deteriorating US real rate is set to remain a key obstacle to any sustained dollar recovery.
CAD: Softness extended in overnight trade but there is little apparent conviction behind the CAD drop at the moment; crude is firm and equity market trends are somewhat mixed and there is little “new” news on the domestic front to weigh significantly on the CAD this morning. The government is considering “very, very seriously” a move to impose a mandatory hotel quarantine for (non-essential) air travel from abroad, similar to the moves taken in the UK. We think the CAD may retain a somewhat defensive posture in the short run—limiting intraday gains—the Fed will likely dictate the pattern of trade for the CAD today.
EUR: The much-anticipated resignation of Italian Prime Minister Giuseppe Conte started a period of multi-party talks that could lead to three scenarios: (a) a new government with Conte as PM thanks to new alliances in the parliament, (b) a new government without Conte, possibly with Silvio Berlusconi’s Forza Italia joining the PD-5 Star coalition, or (c) early elections. The last option remains the least favourable for almost all parties involved in the negotiations, thus we still see an early vote as unlikely. That should keep the market reaction contained, with the 10y BTP-Bund spread staying under control and no clear risk-premia build-up in EUR/USD. The economic calendar in the eurozone is quiet today and the Fed should drive most market dynamics. As highlighted above, we could see the dollar inch up and EUR/USD could edge back below its 50-day moving average at 1.2132.
GBP: Another quiet day for the pound. Sterling lacks some clear catalysts today. Cable could be kept below 1.3750 by some dollar gains. Today is all about the Fed so we expect GBP to be driven by external market factors.
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