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Daily Currency Update

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The Duration of the USD Rebound Proved Limited

USD: As has been the case in prior months, the duration of the USD rebound proved rather limited and we currently observe renewed across-the-board USD weakness. While expectations of US growth outperformance vs the eurozone may put a question mark over the bearish USD story, as long as the Fed sticks to its Average Inflation Targeting framework, allows for the CPI overshot and keeps rates on hold (our base case for this year and next), the deeply negate real rate will weigh on USD. On the US data front, we expect December headline CPI to stay at 1.2% year-on-year today but more meaningful acceleration is expected from the second quarter onwards.

CAD: Rising crude oil prices are helping lift the CAD (oil sands supply disruptions have also halted—and reversed somewhat). The CAD’s modest out-performance is pressuring EURCAD which has served a firm-ish support in the past couple of months and we are not persuaded that the CAD can continue to push broadly higher, given the mixed market signals noted above. Absent any major domestic data releases, external drivers remain more influential for the CAD at this point.

EUR: In Italy, the recent news flow suggests that the junior coalition partner led by former Prime Minister Matteo Renzi is set to leave the government, with the resignation letters of his ministers possibly coming this afternoon. Heightened political uncertainty here has had little impact on the euro in recent days, and we estimate no risk premium has been built in (EUR/USD is trading around its short term fair value, based on our estimates).

GBP: Sterling got a boost from Bank of England Governor Andrew Bailey's comments that downplayed the odds of negative rates. This is in line with our view that the BoE is unlikely to cut rates into negative territory (due to the issue of bank profitability as well as the expected economic recovery from 2Q21 onwards) and coupled with faster vaccination in the UK than in the EU. We look for more pronounced GBP upside vs USD as the cross will benefit from the rising EUR/USD – we forecast GBP/USD 1.48 by end 2021.

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