US CPI data for February is due out today, with the markets bracing for another gearing-up in US inflation. Most analysts are looking for the headline rate to rise further to its highest level since 1982 just shy of 8% YoY. Importantly, core inflation is expected to follow suit with a further pick-up to 6.5% YoY. The bar for another upside surprise to eventually revive speculation over a 50bp move from the Fed in March has nonetheless been put at very high levels due to heightened geopolitical risks on the global stage. Yet, higher inflationary pressures at present could still have longer-lasting ramifications onto the medium-term outlook, as they will likely translate into stickier inflation further down the line. For the USD though, it looks like most of the good news is already in the price, as US money markets are discounting about seven 25bp rate hikes for the year ahead.
The CAD has picked up a little ground overnight with the USD’s gains trading blocked around the 1.29 level. The CAD is a middle performer among the major currencies, however, and is lagging its G10 commodity currency peers. Commodity prices are modestly lower but the CAD’s performance continues to reflect the broader USD tone on the one hand and the risk backdrop on the other. A significant appreciation of the CAD will likely only occur if there is an easing of tensions in the Ukraine conflict which would encourage investors to reduce exposure in the USD. There isn’t much happing domestically today. Employment data is expected to be released tomorrow. USD/CAD Chart.
Growing market hopes for a ceasefire deal between Ukraine and Russia have been helping the EUR recover more recently. The outcome of the Ukraine crisis remains highly uncertain, however, and investors could continue to use the EUR as a war hedge. The crisis will also cast a shadow on today's ECB meeting and force the Governing Council to postpone any meaningful adjustment of its policy. That said, expect the ECB will reiterate that, while delayed, its policy normalization has not been derailed. A less dovish-than-expected outcome of the ECB meeting today could keep the EUR supported but only if hopes for a resolution of the Ukraine crisis persist in the near term.
Given the euro's higher exposure to the Ukraine conflict compared to the pound, encouraging developments towards some de-escalation are a net positive for GBP. Looking ahead, we might see the GBP/USD break above 1.3200 today, but further strength in the pair may well be challenged by investors’ reluctance to let go of all their defensive US dollar positions given the still elevated uncertainty on the geopolitical and market liquidity conditions.
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