European data and global risk sentiment drove G10 FX dynamics yesterday. A weak start to the week for risk assets kept the dollar supported, especially during the US session, and signalled some market cautiousness ahead of multiple risk events: the FOMC tomorrow, ECB and Bank of England on Thursday, and US payrolls on Friday. Today, the last few pieces of US data before the Fed decision will be watched closely. Particular interest will be on the Employment Cost Index (ECI), which is expected to have eased from 1.2% to 1.1% in the fourth quarter. This is a key input in the Fed’s policy equation, and we could see investors shift positions ahead of the FOMC if the ECI surprises on either side. Our view for tomorrow is that the Fed still has an interest in hanging on to a hawkish rhetoric and pushing back against speculation of an early peak - net result for the dollar may be positive. We think the dollar can hold on to yesterday’s gains going into the FOMC meeting. Volatility looks likely to pick up quite markedly during the remainder of the week.
After finding good demand near CAD1.3300, the US dollar jumped to CAD1.3390 yesterday and has surged to nearly CAD1.3460 today. The risk-off mood seems to be the key driver. The CAD gains are hard to come by but are easily still easily conceded. The hot run in Canadian data releases may be starting to cool off a little so the risk of any upside surprise upcoming data is probably limited. For the USD/CAD, resistance is seen in the CAD1.3500-20 area. Initial intraday support may be in the CAD1.3420-40 band.
European rates markets had to deal with a surprising acceleration in Spanish inflation yesterday, which reinforced expectations of multiple 50bp hikes by the ECB. At the same time, the growth picture seems to have deteriorated, as Germany recorded negative growth in the fourth quarter. Eurozone-wide GDP figures will be released today, and are expected to show a 0.1% quarter-on-quarter contraction. However, it seems more likely that CPI figures out of France this morning will have a bigger impact on the euro. A rebound in inflation is a more concerning development for the ECB than soft growth data which were heavily impacted by energy prices. The euro may show more resilience than other G10 peers given the shift in the inflation narrative. EUR/USDis likely hover around the 1.0850 handle until tomorrow’s FOMC.
There are no key data releases in the UK before Thursday’s Bank of England meeting. Markets are currently pricing in 46bp at this meeting and an additional 25bp in March. We expect a broadly neutral impact on the pound, and GBP/USD moves may be mostly dictated by the FOMC reaction.