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Brace for a volatile session ahead - U.S. & Canadian job numbers take centre stage

USD - US Dollar

FX markets are relatively calm ahead of today's US December jobs report. After the release of the Fed's minutes earlier this week, broader trade-weighted indices of the dollar are still within 1% of their late November highs, and the Fed now takes center stage. The focus is shifting to how rapidly the Fed can raise rates.

The current conditions make for a difficult FX environment; given that the Fed appears to have fully embraced the hawkish narrative, most expect the dollar to remain strong today, even if nonfarm payrolls disappoint. The consensus appears to be for a headline job number of 450k and an unemployment rate of 4.1 percent. With the Fed's shift to inflation, the unemployment rate and average earnings appear to be becoming more crucial. Any strong readings there could see the dollar pop higher.

CAD - Canadian Dollar

The loonie has found some support thanks to yesterday's oil rally, with the USD/CAD now settling below 1.2800. In addition to non-farm payrolls in the United States, Canada's jobs numbers for December will be announced today. The consensus forecasts a moderate increase in hiring, but there's a chance of a negative reading, which would worsen a domestic economic story that is already facing the strains of tough covid containment measures.

The only major data release before the 26 January Bank of Canada meeting is the December inflation report, meaning that disappointing employment data today may offer a reason for policymakers to sound more cautious on tightening given the Omicron spread. The short-term outlook for CAD remains mostly tied to risk-sentiment swings and oil performance, although the worsening domestic picture and a market positioning both suggest the loonie is now facing an unusual domestic drag.

EUR - Euro

EUR/USD remains firmly trapped in its 1.1180-1.1380 range. In the eurozone today the focus will be on whether headline CPI has turned the corner. December CPI is seen at 4.8% year-on-year versus 4.9% prior. The narrative of inflation turning lower in the eurozone before it does in the US, and particularly in the UK, is one that can weigh on the EUR in the first half of 2022.

With the Fed on the verge of starting a potentially aggressive tightening to deal with inflation, most analysts continue to favor a lower EUR/USD over the next six months. For today, any upside surprises to the price components of the jobs report could send EUR/USD back to 1.1180/1220.

GBP - British Pound

GBP is now trading at the highest levels since that fateful summer of 2016. The strength of sterling seems to correlate with moves in the sterling rates and yield markets, where UK yields have seen by far the largest adjustment in the G10 space over recent weeks. A lot is priced in for the Bank of England now. A 25bp hike is 80% priced for the 3 February meeting and the Bank Rate is priced at 1.00% for the August meeting. Locally today we have the BoE's Catherine Mann speaking twice but is unlikely to shift any BoE market pricing.

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