An on-consensus US CPI release yesterday did not interrupt this year’s narrative of the US Federal Reserve being able to cut rates later in the year and the dollar being able to fall. Consensus is now behind consecutive 25bp Fed hikes in February and March, followed by a Fed turning dovish over the summer and starting to deliver rate cuts later in the third quarter. The Fed taking rates back towards less restrictive territory remains a tailwind to risk assets – especially to emerging risk assets buoyed by China rebound expectations. It is a quiet day for US data, and a soft University of Michigan consumer sentiment plus declining inflation expectations can keep the dollar on the back foot.
While the CAD has progressed against the soft USD over the week, it ranks among the weaker performers over the past five days, with gains (0.75%) that are about half of those of its G10 commodity peers. Commodity prices have strengthened somewhat this week—the Bloomberg Commodity Index is having its best week since Nov—reflecting China’s reopening moves and building hopes that the global economy is holding up better than expected early in 2023 and additional gains may provide some backing for the CAD. US dollar is trading heavily against the Canadian dollar. It traded near 1.3320, the lowest level since late November. Nearby support is seen around 1.3300 and then the mid-November low closer to 1.3225. Observe the USD/CAD trends.
The ECB’s trade-weighted euro has now returned to levels seen last February and the year-on-year change in EUR/USD is now mildly positive. This will be welcome news to the ECB, where last summer’s 6% YoY EUR/USD decline was contributing to the inflation problem. For today, the eurozone data calendar sees the release of November industrial production and the trade balance. EUR/USD remains on course for 1.0900 and possibly 1.0950. Weekend profit-taking may pose the biggest risk to EUR/USD, but 1.0750 should now be a good near-term base.
While the GBP has held its ground vs the USD so far in 2023, it has clearly lagged the EUR as well as most other G10 currencies. Any potential downside surprises from today’s GDP, industrial & manufacturing production as well as trade & services data for November could add to the divergence between the GBP and EUR. we maintain a cautious outlook on the GBP because we worry that persistent central bank tightening could undermine global risk sentiment while a less hawkish-than-expected BoE could further erode the GBP’s rate appeal.
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