Yesterday’s release of FOMC minutes could have been perceived as slightly hawkish, yet FX markets barely budged. At the heart of the 2023 story is the risk management of the Federal Reserve under-appreciating sticky inflation versus over-tightening and delivering weaker-than-needed growth. The Fed is still more concerned by the former and plans ongoing rate increases. In practice, this means another 50bp hike in Q1 and then rate cuts from the third quarter onwards. For rate markets the battle this year seems to be whether inflation will allow the Fed to deliver the roughly 50bp of easing expected in the second half of the year. Today’s session will focus on the December ADP jobs data, where a +150k number is expected after last month's 127k rise. Currently, the consensus expects tomorrow's December nonfarm jobs reading at +200k.
Canada reports its November merchandise trade balance today. The improvement in the Canada's trade balance faltered in recent months but the market does not appear particularly sensitive to the report. The US dollar held support yesterday and today near 1.3480 and is still holding in a similar range this morning. Our fair value model suggests the USD is slightly overvalued at the moment. We suspect there may be potential toward 1.3550 today, ahead of tomorrow's jobs report.Observe the USD/CAD trends.
The sharp fall in energy prices is being welcomed across Europe. That is already showing up in softer-than-expected German and French inflation data. Today the focus will be on Italian inflation data ahead of tomorrow's eurozone December CPI release. EUR/USD may struggle to make further upside gains until key event risks have been surmounted such as tomorrow's December US jobs release and next Thursday's US December CPI reading. Expect EUR/USD to continue trading in a 1.0580-1.0640 range, though we would probably say the upside risks are greater given developments in the energy story.
The UK Conservative government came out on the offensive yesterday with Prime Minister Rishi Sunak announcing five strategic targets for this year, among which were halving inflation, stabilizing debt to GDP and ensuring a return to growth. The reduction in inflation may be the most attainable of these three. Today sees the release of the Bank of England's Decision Maker Panel (DMP) survey. This looks at inflation expectations in the business sector – which is expected to fall. We think the market is over-pricing the BoE tightening cycle at a peak near 4.50% (+100bp) in August this year. GBP/USD should continue trade within this week's 1.19-1.21 range.