Another day and another piece of positive US activity data. Yesterday saw a strong January retail sales release. The data provides ammunition for the Fed to remain in hawkish mode and for the market to continue to price two to three more 25bp Fed rate hikes by the summer. February's hawkish re-assessment of Fed policy has lifted short-dated US yields by 50bp over the last two weeks and reinserted a little volatility back into the interest rate and FX space. We suspect the dollar to remain range-bound for the rest of this quarter. For today, the US focus will be on the January PPI numbers, initial claims and the Philly Fed business outlook.
The CAD is a relative under-performer on the session. Positive risk appetite is giving the CAD a modest lift after US dollar recovered from 1.3275 on Tuesday to 1.3440 yesterday, seemingly driven by US data and the volatility of US equities. A quieter tone has emerged today, and the greenback barely traded above 1.3400 yet again. Support is seen around 1.3340-50 today. There are no Canadian data today but Governor Macklem and Senior DG Rogers appear before the Commons Standing Committee on Finance. The US S&P 500 still offers a reasonably good direction cue. Observe the USD/CAD trends.
It looks like EUR/USD is settling into a broad 1.05-1.10 trading range this quarter. Looking past Q1 we expect the EUR/USD to push decisively above 1.10 in the second quarter as the US disinflation story accelerates. The European Central Bank hiking a further 75bp - taking the deposit rate to 3.25% in May - certainly helps too. There is not much in the way of eurozone data today. EUR/USD is bouncing off the recent 1.0650/0660 lows and expect it to continue trading well within the confines of a 1.0650-1.0750 range today.
GBP continues to show high sensitivity to monetary policy. This week's slightly softer-than-expected wage and core CPI data have seen GBP hand back a budding rally. We suspect this will be the story for most of this year. The UK data calendar is quieter today ahead of tomorrow's release of January retail sales. We look for one last 25bp hike at the 23 March meeting - taking Bank Rate to 4.25% - where it will be left until summer 2024. For today, GBP should continue to find support in the 1.1950/20.00 area.
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