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FX Week Ahead: Running out of road

USD: The Fed keeps the punchbowl in place

FX markets will start the week buffeted by Brexit news and also whether there has been any progress on a US stimulus bill – perhaps as well concerns over a government shutdown. With the US struggling with the pandemic, however, one assumes that Congress would want to avoid a shutdown at all costs. As the week progresses, the focus will shift to Wednesday’s FOMC meeting. Our team expect a dovish message to be maintained as well as perhaps some forward guidance on the Fed’s asset purchases.

The US data set sees November industrial production and retail sales as well as the weekly focus on (now rising) initial jobless claims. All should point to the need for continued loose monetary and fiscal policy.

CAD: Better inflation outlook won’t be a big help to the loonie

USD/CAD failed to break below 1.27 this week but still remained generally pressured. We believe that the CAD has more to benefit from further global equity outperformance, better recovery prospects as a vaccine will start to be rolled out in North America soon and from the recovery in oil prices.

The Bank of Canada meeting last week left CAD largely untouched, as the bank merely reiterated its lower-for-longer pledge while acknowledging global and domestic conditions have improved. In our view we don’t think that the BoC will get in the way of more CAD appreciation. This week, November CPI numbers will be watched closely to track any additional signs of life in inflation following October’s surprising 0.7% YoY read. For now we expect the CAD to continue to steamroll ahead.

EUR:  Signing the Brexit blues

Were it not for Brexit, we think EUR/USD would be trading 1.23 by now. Presumably, GBP will be dragging EUR around by the nose this week, driven by any progress – or lack thereof – on Brexit discussions. Despite the turmoil we believe EUR/USD should stay supported and possibly extend gains in the days ahead.

Eurozone calendar is relatively light this week. We’ll see October Industrial Production on today and then the first look at the December PMIs for the Eurozone, Germany and France on Wednesday. Lockdowns have taken their toll on the service sector and from the looks of it, consensus expects little rebound here in December.

GBP:  The waiting game continues

While a very close call, we continue to think the UK-EU trade deal is more likely than not. We can easily see the negotiations dragging beyond this week but the deal should eventually be reached. We see a modest upside in the case of a deal but profound downside in the event of no deal as fairly limited risk premium is currently priced into GBP.

On the data front, the BoE meeting is on Thursday but as the outcome of the Brexit negotiations may not be known, the central bank should keep its policy stance unchanged.

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