Despite Federal Reserve Chair Jerome Powell sounding quite relaxed at the 1 February press conference and declaring that the 'disinflation process has started', the minutes of that meeting were largely hawkish. The consensus agreed that further rate increases were needed and that inflation remained unacceptably high. There were no hints of a pause and very little to divert market pricing of three more 25bp hikes from the Fed over the March, May and June meetings. This backdrop will keep the dollar supported in the near term and potentially into the 22 March FOMC meeting. For dollar bears, both activity and price data will have to soften over the coming weeks to make an impact on an otherwise hawkish Fed. The next set of meaningful US data is tomorrow's core PCE data. For today, the market should not take too much notice of revisions to the strong fourth quarter GDP data - driven by an inventory build and weaker imports.
The US dollar is trading inside yesterday's range against the Canadian dollar (1.3515-1.3570). In the absence of any major domestic news, the CAD’s still firm correlation with equity market volatility means that the risk backdrop will remain the main drivers for the CAD. A break of yesterday's lows encouraged by the S&P 500 snapping a four-day fall, could signal a test on the 1.3500 band of support and possibly lower. Observe the USD/CAD trends.
The better run of European PMIs earlier this week has been drowned out by the hawkish Fed. Despite strong PMIs, the German Ifo proved something of a reality check, where the current assessment of business conditions continued to deteriorate. The good news for EUR/USD is that the re-pricing of the European Central Bank cycle has nearly matched that of the Fed. For the short term, EUR/USD remains weak and it is hard to rule out a break under 1.0600 towards the 1.05 area.
GBP is holding onto Tuesday's gains when strong PMI data triggered a sharp re-pricing of the Bank of England rate policy. Markets now price a further 50bp of BoE hikes by June - taking the Bank Rate to 4.50% - and the policy rate being kept there until early 2024. For today, there isn’t much in terms of data releases leaving the pound to trade on broader market themes. GBP/USD should find support at 1.20.