The dollar started the week tracking the swings in US Treasury yields. Expect any dollar declines to be short-lived in the immediate term, as the upcoming Fed tightening story continues to provide a strong undercurrent for the greenback. At the same time, there hasn't been a clear catalyst for a significant move higher: today's first Senate hearing of Fed Chair Jerome Powell could be the impetus for an out-of-range move. Powell stated in a prepared statement that the Fed will not allow inflation to take hold in the economy, but Senators will most certainly try to deduce a more precise plan on how the Fed intends to combat rising prices.
With markets flirting with the idea of four rate hikes (three and a half are already priced in) in 2022 and an implied rate now around 1.75%, the bar for a hawkish surprise is still a strong possibility. An acknowledgement that faster rate hikes are needed could be enough to offer more support to the dollar today as investors cement expectations around 100bp of tightening in 2022.
CAD - Canadian Dollar
To begin the week, the CAD has outperformed gaining versus the US dollar and most other crosses. Oil prices have been steady and are now flirting with the $80/barrel mark. Around the world, risk appetite is flat to mixed, as markets are waiting for Powell's comments later today. The CAD should be supported by last week's better-than-expected Canadian jobs data, which also strengthens the case for the Bank of Canada to begin tightening monetary policy soon. The majority of Canadian banks are still bullish on the CAD's prospects and expect it to appreciate in the medium term.
EUR - Euro
Although hawkish words by Powell today may prompt a move lower, EUR/USD appears to be finding some support around the 1.1300 level. Analysts believe the EUR/USD will drop to the lower end of its December/January range of 1.1240/1.1380 in the next few days. There are no apparent domestic drivers for the EUR at the moment, with the EUR/USD being dominated by dollar/risk sentiment fluctuations. For the time being, the focus should be solely on ECB speakers.
GBP - British Pound
The UK data calendar is quiet today, but the pound has remained strong to the start of this week. The majority of analysts believe the GBP will continue to be supported in the near future. On Friday, a strong GDP report should provide additional support and maintain a bullish stance for the GBP.
Important Economic Calendar Event Ahead
Details about the event:
Time: 10:00 am eastern time.
Federal Reserve Chair Jerome Powell testifies before Congress, providing a broad overview of the economy and monetary policy. Powell's prepared remarks are published ahead of the appearance on Capitol Hill
An update will be posted as soon as it released the data.
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