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Daily Currency Update

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Investors Remain Wary Ahead Of The FOMC Decision Today

USD - US Dollar

G20 FX has traded in tight ranges in the run-up to today’s FOMC policy decision. We think the FOMC will deliver a well-telegraphed 50bp rate hike, with a 75bp move not completely off the table but unlikely at this stage. The reasoning is well known: 8%+ inflation, tight labour market, rising wages. Against this backdrop, the Fed will simply overlook the 1Q GDP contraction and fully focus on fighting inflation. We also expect quantitative tightening to be announced today after the latest minutes signalled widespread appetite across the board to let the balance sheet shrink. We expect the Fed to start with $50bn being allowed to run off each month before increasing it to $95bn by September. The dollar is likely to face limited downside risks today, or any negative reaction may be short-lived.  

CAD - Canadian Dollar

The CAD has been on the back foot at the start of May as USD/CAD posted fresh YTD highs just shy of 1.2915. Market jitters about the impact of China’s strict Covid policy and the Fed’s aggressive tightening on global growth have favoured the USD. Looking beyond these factors, the long-term fundamentals continue to call for CAD gains over the USD.  Today’s macro releases look set to offer more evidence of key divergence between Canada and the US. The former is expected to post its largest trade surplus while the latter is due to register a record nominal trade deficit, and close to its worst position in % of GDP. At present, heightened uncertainties surrounding the global economy and energy markets make it more difficult to assess whether the recent shifts in Canada and US external trade positions are to become entrenched. All said, the CAD should gradually outperform the USD in the long run.  

EUR - Euro

EUR/USD has been able to trade above the 1.0500 mark, but the risk of a decisive technical break lower remains quite high in the coming days. The euro has been unable to materially benefit from hawkish comments by ECB members, and we continue to believe this mostly boils down to a market that is already pricing in a good deal of ECB tightening by year-end (around 90bp as of this morning), and official ECB statements that have so far fallen significantly more on the dovish side compared to out-of-meeting communication. Today, it’s going to be up to the FOMC announcement and the impact on the dollar to determine the direction for EUR/USD. The eurozone calendar only includes March retail sales data, and there are no scheduled ECB speakers. 

GBP - British Pound

GBP/USD broke below 1.2500 for the third time in three sessions this morning. Similar moves on Monday and Tuesday were, however, quickly reverted. Still, it looks like a matter of time now for the pair to make a decisive break lower: if not triggered by the FOMC announcement today, it could come as a consequence of tomorrow’s Bank of England policy meeting, which we expect to defy hawkish expectations and add some pressure to the pound. There are no data releases to mention in the UK today. 

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