US Dollar Comment: The dollar has given up some of its recent gains this week, but we are reluctant to see this as a signal that the bullish sentiment on the greenback is shifting. It appears more likely that the modest correction was triggered by some profit-taking as markets now fully price in the start of Fed tapering by year-end and the first hike in September/November 2022.
Today, the US calendar includes September retail sales as well as the Empire manufacturing index and the University of Michigan survey for October, but we expect the releases to have a contained FX impact. While we don’t think the dollar downward correction has legs, we may have to wait for the next week to see the greenback re-join its upward trend, and DXY could close the week around the 94.00 level.
Canadian Dollar Comment: The CAD has made marginal progress overnight to probe the mid-1.23, a move that should provide additional (technical) motivation for the CAD to push on a little more. The current environment is CAD supportive alongside high energy prices. Preliminary year end forecasts suggest a 1.22-1.24 range for the USD/CAD.
Euro Comment: EUR/USD remains almost solely driven by dollar dynamics and the lack of any clear domestic upside catalyst for the euro is likely limiting the pair’s upside. As discussed above, we do not expect the dollar’s soft momentum to last. The EUR/USD the rebound is likely to follow a similar path to that seen in the first days of October, stalling around the 1.1640 level.
British Pound Comment: Aggressive rate hike expectations continue to offer some underlying support to sterling. The GBP may have to give up some of its recent gains as Economists expect the BoE to underdeliver on monetary tightening. We also note that sterling appears somewhat complacent to the new frictions between the EU and the UK and the quite material risk of the bloc imposing retaliatory trade measures should the UK unilaterally suspend parts of the Northern Ireland protocol.
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