The nomination of Jerome Powell for a second term as Fed Chair was the major driver for markets yesterday. In FX, it generated another round of USD buying and markets reinforced their views around a first Fed hike by mid-2022.
The dollar index has continued to break higher and is now trading at levels last seen in July 2020. Today, we might see most USD crosses stabilize around current levels. A wait-and-see approach might prevail ahead of tomorrow’s FOMC minutes and the US calendar includes only the rarely market-moving Markit PMIs and Richmond Fed surveys.
The CAD weakened further overnight with the spot now trading well above 1.27. The recent slide in crude oil and last week’s CPI data checked enthusiasm for the CAD to some extent. Extensive flooding in the west of the country may also represent a drag on the economy and CAD sentiment in the short run but the situation is unlikely to deflect the BoC from the tightening course it has set out on (BoC expectations are little changed and continue to point to a relatively aggressive ramp-up in rates in the next 12 months). Consensus suggests the USD gains are unlikely to extend too as seasonal forces in December which should weigh on the USD broadly. There are no major domestic data releases today—and little in terms of economic data this week—which will leave the CAD somewhat at the mercy of the broader market tone and the USD in the short run.
EUR/USD continued its fall, now trading in the lower half of the 1.12/1.13 range. While widespread dollar strength was mostly behind yesterday’s leg lower in the pair, the common currency is also dealing with a worsening of the Covid situation in Europe. All this is naturally paving the way for some re-rating of European growth expectations, ultimately leaving the EUR quite vulnerable. The data flow is also looking unlikely to come to the rescue of the EUR, as eurozone PMIs today should inch lower in both the manufacturing and services sectors.
A potential pause in the dollar’s appreciation today may give EUR/USD some rest, but the risks remain skewed to the downside and the recent break below 1.1250 may have paved the way for another leg lower to the 1.1170 support in the coming days.
The vicinity of the UK to the EU, where cases are rising dangerously and new restrictions are being discussed, maybe keeping pressure on the British Pound. Markets could be reluctant to speculate that the UK will be able to dodge another serious Covid wave. That said, GBP is clearly looking less vulnerable than the EUR at this moment. Today’s focus in the UK will be on November PMIs, which are expected to decrease only marginally. We think the surveys should not particularly affect the market’s conviction that the Bank of England will hike rates in December, particularly given the strong jobs and inflation reports last week.