USD: Both US January CPI and Chair Jerome Powell’s speech yesterday underlined the positive outlook for cyclical FX for upcoming months, particularly in early Q2. While US CPI pressures are present in the US and inflation is set to rise, they don’t show signs of being out of control, in turn allowing the Fed to stay cautious.
This was reiterated in Chair Powell’s speech which, rather than focusing on prospects of a fast recovery and the risks of overheating, focused on the struggling labour market, the associated downside risk and the need to keep monetary policy ‘’patiently accommodative.’’ This means that any shift in the policy stance (to a hawkish, less accommodative side) is not imminent, US front end rates are to remain anchored, the US curve is set to steepen further and real rates are to remain deeply negative.
As the global economy starts its post-winter recovery in Q2, this suggests more upside to cyclical currencies, while negative US real rates should also offer to help hands to the low yielding ones, such as EUR vs the dollar.
CAD: The loonie continues to reflect the broader market backdrop, with the modest, pro-risk bias helping keep the CAD supported, even as crude oil prices have backed a little off this week’s peak. BoC DG Lane’s comments yesterday added nothing to the CAD story but the central bank’s critical perspective of crypto was notable (a ‘speculative mania’). The broader uplift in commodity prices as global recovery hopes develop is providing CAD sentiment with a decent lift but the Federal government’s vaccination plan/roll out does appear to be something of an offsetting constraint on the CAD which is curbing its ability to take greater advantage of commodity gains.
EUR: It is a very quiet day on the Eurozone data front. The lack of USD upside after yesterday US data points suggests EUR/USD is to stay above the 1.2100 level.
GBP: Michael Gove is meeting European Commission VP Maros Sefcovic today with the UK requesting a delay in a border checks implementation between Northern Ireland and the rest of the UK - a part of the Brexit deal. It looks unlikely that an agreement will be reached today, but it should be perceived by the market as a minor issue, unlikely to affect GBP much. GBP outlook for coming weeks is constructive and expected to test new highs.
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