The New Year begins with investors viewing the global economy through a glass half-full lens. Stock markets are hovering at all-time highs, while industrial commodities prices are gradually rising. OPEC+'s decision to start production increases in February appears to be a vote of confidence in the demand story as well.
The US economy appears to be in good shape, which keeps the Fed's normalization and strong dollar narratives alive. When the minutes of the December FOMC meeting are posted later today, we'll get additional information on this. This meeting was as hawkish as they come, with a faster reduction of the Fed's quantitative easing program and a median projection of two rate hikes in 2022.
It may be premature to pronounce the dollar bull trend over, but some consolidation at higher levels may allow for the development of other narratives. Taking cues from the December ADP jobs statistics and the FOMC minutes, we expect the USD to remain supported today.
The CAD is hovering around 1.27 as investors consider the economic risks associated with Ontario's new restrictions—restaurants and gyms closing, schools reverting to online learning, bans on indoor gatherings, and WFH for many people. The limits haven't had a substantial influence on BoC expectations yet, but most analysts continue to remain optimistic about the CAD's long-term prospects. In the immediate term, though, a renewed focus on Omicron may keep the CAD trading on the defensive. On Friday, jobs data is likely to show a solid 25k growth for December. The loonie will most certainly follow the FOMC minutes, which are expected to be released today.
Since late November, the EUR/USD has been trading in a band of 1.1180-1.1380. Most analysts continue to predict a bearish outlook, but this may have to wait until US data is good enough to persuade investors to expect three Fed rate hikes this year and a longer tightening cycle. Most analysts expect a break lower in the first half of the year, as the market begins to focus on the first ECB rate hike, which is expected in March. In conclusion, 1H22 could be the opportunity for EUR/USD to make a new low (e.g. 1.08/1.10) before a late-year rebound. In the immediate future, expect the euro to trade on broader market themes.
The GBP had a great end to the year. It has broken to the strongest levels since early 2020 on a trade-weighted basis. Investors appear to have applauded the UK government's decision to push through the Omicron rush with little constraints. The logic seems to be that an open economy and high energy prices will keep the possibility of a further BoE tightening in February alive. Also keep in mind that UK inflation may not peak until April, whereas Eurozone inflation may be peaking right now. In the coming weeks, the GBP is expected to remain supported and possibly increase.
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