The dollar’s rebound from last Wednesday’s lows has continued, with markets favoring defensive dollar positions as investors position themselves for another 75bp hike by the Fed tomorrow. Today, the focus will be on data releases in the US, and in particular on ISM manufacturing numbers, which might fall back into contraction territory (< 50) for the first time since 2020. While that would endorse well-established concerns of a hard landing for the US economy, it may not do much to divert market expectations ahead of tomorrow’s Federal Open Market Committee (FOMC) announcement. A 75bp hike is very much the consensus, but there has been growing speculation on some dovish pivot. We doubt the Fed will fuel such speculation tomorrow, which should set the stage for an extension of the dollar recovery in the second part of this week and beyond. For today, however, we may see some wait-and-see approach and somewhat lower volatility given the proximity to the big FOMC risk event.
The US dollar peaked yesterday near 1.3685. With US equities trading firmer and the greenback on strong footing, the Canadian dollar is likely to remain stronger. The US dollar traded to almost 1.3540, and its pre-weekend low was closer to 1.3525. Look for the CAD to remain rangebound today ahead of tomorrow’s FOM. Observe the USD/CAD trends.
EUR/USD has moved back close to 0.9900, and most see more downside potential this week. Yesterday, the eurozone’s CPI numbers came in very hot – headline inflation at 10.7% – and third-quarter growth data met expectations of a 2.1% year-on-year expansion. These figures are unarguably keeping pressure on the ECB to stay aggressive on tightening. The eurozone calendar is very light today, and there are no scheduled ECB speakers. We continue to favour a weaker EUR/USD into 0.9500 in the near term.
The pound has been the weakest currency in G10 at the start of this week, with volatility staying high as we approach the key Bank of England (BoE) meeting on Thursday. The BoE is expected to hike rates by 50bp which would add pressure to the pound. Interestingly, it appears that the pound extended losses yesterday after the UK meteorological office issued a warning that this winter may be colder than usual. European currencies including the pound are obviously the most affected. The combination of a GBP-negative BoE and a USD-positive FOMC could press cable into the pre-Rishi Sunak 1.12-1.13 area by the end of this week.
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