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The Fed Won’t be the First to Turn Off Their Taps

USD: This week has seen a couple of central banks, Norges Bank and Bank of Canada, re-iterate baseline views of a recovery which will allow 2022 rate hikes or unused QE programmes. FX markets like these stories and have taken both currencies a little higher. Arguably the same story (unused ECB PEPP) has provided a little support to the EUR too.

Will the Fed join them next week? That seems unlikely. Treasury Secretary nominee, Janet Yellen, is still talking about the risk of doing too little on the fiscal side and with a Fed very much focused on inclusive growth, it would seem unlikely that the Fed will want to generate any tighter financial conditions by shedding light on tapering plans – there’s little to be gained for the Fed here. Reflationary Fed policy will remain a dollar negative. That is not to say we cannot see some more dollar consolidation.

CAD: The CAD is up slightly versus the USD so far this year, in contrast to most other majors, helped by a climb in crude prices alongside a less dovish BoC announcement than expected. But at 1.26, CAD is trading at a level that risks a headwind for the recovery in Canadian exports and business investment in export-oriented sectors, a view that the BoC shares.  That could see the C$ give back some of its recent gains, towards a bit more weakness for the greenback against other majors.

EUR: EUR/USD found some support from the ECB yesterday and the focus today will be both on the January PMIs and the ECB survey of professional forecasters. On the former, consensus expects broad lockdown-driven falls in the composite PMIs led by services. On the survey side, the focus here will be on inflation expectations and presumably on how much the expectations of 1.3% in 2022 and 1.7% longer term change. Most are generally positive on EUR/$, but further consolidation could be seen. 1.21-1.22

GBP: UK media is running with the story that Nissan will retain its car production plant in Sunderland after the Brexit deal – supporting 75,000 direct and indirect jobs. Elsewhere lookout for UK January PMI today, potentially upsetting the GBP rally.

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