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US CPI will Remain under Target but Profile May Show Signs of Acceleration

USD: All eyes are on US January CPI and Federal Reserve Chairman Jerome Powell’s speech today, given the focus on the reflation theme and the prospects of possible overheating of the US economy. On the former, CPI today should remain subdued at 1.6% year-on-year. However, it is the profile that matters, with a sharp acceleration expected in the second quarter and US CPI spiking to 3.8% in May. On the latter, while concerns are increasing whether the Fed is signalling a too loose policy set up given the inflation and growth outlooks (both helped by the prospects of a large US fiscal stimulus), it is likely that Chair Powell remains cautious today and does not deviate from the message of the last FOMC meeting.

CAD: Is little changed on the day and has made only marginal headway since the end of last week when the USD started to show renewed signs of broader—short-term, at least—softness. Crude oil and a further, if modest, narrowing in longer-term rate spreads suggest the CAD has a little more upside potential. BoC Deputy Governor Lane speaks on digital currencies and payment modernisation. This week’s decline in USD/CAD highlights initial support at 1.2682 ahead of a key triple bottom at 1.2630.

EUR: EUR/USD embarked on a tentative recovery and with Powell unlikely to signal any change in the Fed’s guidance today, EUR/USD should stay above the 1.2100 level. Germany may go its own (additional) way in vaccines procurement with Merkel’s government unhappy with the EU’s pace and considering the purchase of Russian and Chinese vaccines. The move may accelerate the rate of vaccinations in the country (and aid the EUR). But it hardly looks good that Germany, one of the EU’s biggest backers, is going its own, independent, way and puts more pressure on EU. The EUR should generally follow the dollar tone for the rest of the week.

GBP: GBP/USD broke above the 1.3800 level – the highest reading since April 2018. While the bullish repricing of the GBP specific outlook has been the main supporting factor of the cross over the last two to three weeks, right now GBP/USD is benefiting from the EUR/USD recovery. Looking ahead, most expect both factors to work in favour of GBP/USD, with the cross moving towards the 1.50 level throughout the year.

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