The Dollar’s Performance At The Start Of The Week Has Been Mixed
USD - US Dollar
The USD struggled versus the commodity bloc yesterday, although it still outperformed the EUR and the JPY. The release of in-line US factory orders for February had no effect on the USD, but today's package of US macro data (external trade numbers and ISM services) may be more impactful. Any predicted rebound in the services PMIs, in particular, should provide some solace that domestic demand is coping well in the current environment. Market investors should also pay attention to today's comments from Fed officials John Williams, Lael Brainard, and Mary Daly, as the latter has already signalled that the argument for a 50bp rise in May has increased. Look for the USD to strengthen against most of it G10 FX peers.
CAD - Canadian Dollar
USD/CAD slipped back below 1.25 yesterday as energy markets remained on edge. While the CAD often ignores day-to-day fluctuations in Canada's terms of trade, most analysts believe the currency has yet to completely benefit from the underlying boost to the country's wealth conduits. Higher energy prices are expected to result in larger and more recurring trade surpluses, albeit today's external trade numbers may be skewed due to trucker strikes in February. Meanwhile, the Bank of Canada's Business Outlook survey released yesterday revealed record capacity restrictions in both supply chains and the labour market. Wage growth is predicted to accelerate over 5%, and two-thirds of Canadian employers expect inflation to reach 3% in the next two years. As a result of these events, the Bank of Canada is expected to step up its tightening at its meeting next week, possibly with a 50-basis-point rate hike and/or the start of Quantitative Tightening. We still favour the latter, as the BoC may draw cues from the May FOMC meeting, and a significant consideration for USD/CAD at the moment is that the Fed and the BoC are perceived as moving on with their tightening plans essentially in lockstep.
EUR - Euro
At this stage, the euro’s performance is very strictly tied to the content of new sanctions the EU looks likely to impose on Russia; the bigger the implications for the energy market, the larger the impact on the euro. Yesterday, French President Macron said that some very clear measures are under discussion and that he supports sanctions on coal and oil. For now, it still looks unlikely that EU imports of Russian gas will be reduced, but further moves on curbing dependence on Russian oil appear possible. On the domestic side, it’s going to be a very quiet day today, with no market-moving data releases or central bank speakers in the eurozone. EUR/USD could consolidate around 1.0900/1.1000 today.
GBP - British Pound
The pound looks set to be moved almost only by external drivers this week, as markets will have no major domestic inputs to adjust their pricing on BoE rate hikes this week. For now, money markets are embedding five more hikes by the end of the year, which is likely offering some support to GBP in the background. That said, adverse energy developments caused by new sanctions might take a toll on GBP this week. The GBP/USD could make a decisive move below 1.3100 by the weekend.
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