Risk assets have benefited from signs of de-escalation in Russia-Ukraine tensions, as Moscow announced that some of its troops have returned to base after completing a drill. Markets will continue to monitor the situation closely and are reasonably not rushing to fully price out some degree of military intervention in Ukraine: after all, NATO said they still haven’t seen clear evidence of a pullback of Russian troops.
Geopolitics aside, the dollar has received some support from rising speculation around Fed tightening: markets will scan the minutes of the January FOMC meeting today to see how much support there was around a fast start in the tightening cycle. On the data side, the US calendar includes January retail sales (which should be encouraging) and industrial production (expected at 0.5% MoM).
The January CPI report in Canada today should see headline inflation stabilize marginally below 5.0%, while core measures may see a mild acceleration. All this should continue to underpin the need for the Bank of Canada to tighten policy quite aggressively in 2022. Still, markets are pricing in six hikes in 2022, which means that the upside room for the CAD after the CPI release may be quite limited today. We expect USD/CAD to hover around 1.2700 this week, but we continue to see the loonie strengthening in the longer run as the BoC tightening cycle should offer support to the loonie.
EUR/USD climbed as markets turned more optimistic on a diplomatic resolution in Ukraine yesterday and may remain supported today should geopolitical sentiment continue to improve. Quite interestingly, the EUR had no reaction to the quite hawkish comments by the ECB’s Villeroy who suggested that QE could end in 3Q. The negligible market reaction is a testament of the fairly high conviction call by the market around ECB tightening by the end of the year: a narrative that is set to keep providing a floor to EUR/USD into the 10 March ECB meeting. There are no scheduled ECB speakers today and no market-moving data releases in the eurozone, which means EUR/USD will remain mostly driven by swings in risk/geopolitical sentiment.
The improved global risk environment is keeping the pound supported, and this morning’s inflation figures for January in the UK are helping to consolidate gains in GBP/USD. A mild acceleration in both the headline rate (5.5%) and the core rate (4.4%) means that there is no apparent reason for markets to re-evaluate their aggressive bets on BoE tightening at the moment (six hikes by year-end are fully in the price). This should continue to put a floor below GBP in the near term.
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