USD: Reading through the FOMC minutes last night, the key sentence about a number of participants potentially being ready to talk tapering at upcoming meetings seemed a little inconsistent with the rest of the document. Driving that is probably a sense that when the Fed does forewarn the market about tapering (June, July or September?). it will be wary of market surveys that it is expected to take three quarters to slow its asset purchases. And then a further three quarters before the first Fed rate hike. This all points to a first Fed rate hike in 1H2023. A Fed rate hike in early 2023 is currently priced by the market and how those expectations are brought forward - or are pushed back - will determine the path of the dollar and risk assets.
CAD: The CAD has softened somewhat more than we expected yesterday, with weaker risk assets and the sharp fall in oil prices around news of some potential progress in reviving the Iran nuclear deal is weighing on CAD sentiment. Somewhat softer commodity prices certainly represent a headwind for the CAD but we note that CAD-supportive spreads are little changed and should serve to limit losses.
EUR: EUR/USD has held up pretty well amidst the first real wave of a Fed tapering discussion. Yet we have recently been highlighting how monetary policy normalization trends have been driving FX trends - thus we should be wary about the dollar wanting to push a little stronger. The Fed has also been making worthy points about the volatility in data - and potentially in markets - over coming months on the back of the re-opening.
GBP: GBP has held up quite well this week. Investors are taking a glass half-fill approach to the UK economy and prospects for GBP, which should keep GBP bid ahead of tomorrow's releases of April retail sales and May PMIs. Expect a tight GBP/USD range a tight range in the 1.4090 – 1.4160 range today.
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