December is proving a month of damage limitation. Dollar price action is still soft. Any whiff of softer price data - e.g. yesterday's downward revision to US 3Q unit labour cost data has seen the dollar slip. Beyond today's US initial claims will be November PPI data tomorrow and then an incredibly busy week into Tuesday's CPI release and Wednesday's FOMC meeting. Preventing an even large dollar correction this month is the fact that Fed expectations have not yet crumbled. The terminal rate is still priced above 4.90% for next spring and this is just about keeping US two-year Treasury yields above the 4.25% area. Look for a tighter trading range today.
The Bank of Canada delivered a 50 bp hike yesterday to lift its policy rate to 4.25%. Even though many expected a quarter point move, it was a dovish hike because the Bank of Canada said this maybe the end for a while. The statement read that the central bank "will be considering whether the policy rate needs to rise further to bring supply and demand back into balance and return inflation to target." There will be two more inflation reports before the BOC meets again on January 25 (November's CPI will be reported on December 21 and the December CPI will be reported on January 17). Barring a major data surprise, the Bank of Canada will likely remain on the sidelines. From an FX perspective, initial support today is seen around CAD1.3640. The risks are for a weaker Canadian dollar if US stocks continue to unwind the rally that began in mid-October. Observe the USD/CAD trends.
EUR/USD remains supported near 1.05 - helped largely by the dollar's soft performance across the board. The pricing through the OIS market for next week's European Central Bank rate meeting yesterday edged up to a 67bp hike from 54bp a day earlier. The move may be a function of remarks from ECB Chief Economist Philip Lane and seems to be putting the risk of a 75bp hike back on the agenda. We expect the current EUR/USD corrective rally to stall in the 1.05/1.06 area this month. The bigger risk of a rally probably comes more from a less hawkish Fed than a more hawkish ECB. Equally, we see European gas prices edging higher again as a cold snap hits northern Europe. Expect another narrow EUR/USD range today centered around 1.05.
The latest RICS survey on house price expectations highlights a severely negative on the outlook for UK house prices and the lowest since May 2020. That is not a surprise given the cost of living crisis and policymakers in the process of tightening, not loosening, fiscal and monetary conditions. Despite seasonal weakness in the dollar, we really struggle to see GBP/USD trading much higher and the current 1.22/23 levels as perhaps the best GBP/USD levels for the next three to six months.