We are a bit surprised to see markets have started the week with some optimism despite the big risk event represented by today’s US inflation report. January’s inflation report will be an important litmus test for the disinflation story that has driven the slowdown in Federal Reserve tightening. We see the balance of risks as tilted to the upside for the dollar and to the downside for pro-cyclical currencies. A return to the 2023 highs is still a tangible possibility in the near term, even though we continue to favour USD underperformance in the remainder of this year.
The CAD’s fortunes remain closely tied to the broader USD performance as it continues to hold in a flat trading range. The US dollar posted a down day against the Canadian dollar to about 1.3325 yesterday. It is holding above there today but has not been able to get much above 1.3350. It would take a move back above 1.3380 to signal a near-term low is in place. There aren’t any data release in Canada today, leaving the CAD to trade on broader market themes. Observe the USD/CAD trends.
EUR/USD should move purely based on the US inflation report today, as the preliminary release of eurozone growth numbers looks unlikely to impact markets. In line with our dollar view ahead of today’s US CPI, EUR/USD may slip back to 1.0650/1.0700 should core inflation come in at 0.4% or 0.5% MoM. Anything above that would likely trigger a larger contraction and 1.0600 should be tested. We continue to see downside risks for EUR/USD in the very near term as US data may endorse further Fed hikes and the euro lacks any solid domestic support.
Wage data released this morning in the UK came in higher than expected, lifting the pound. Tomorrow’s CPI release will be another key event for the pound, but we think that given the increased focus of the Bank of England on wage dynamics, today’s data strongly endorses a March 25bp rate hike. GBP/USD could fall back below 1.2100 after the US CPI print.
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