The dollar has traded in rather narrow ranges against most G10 currencies after last week’s rollercoaster action. This may have been due to some wait-and-see ahead of today’s US CPI numbers. Consensus is expecting another increase in January headline inflation, from 7.0% to 7.2%, while the core rate may jump close to the 6% mark. We think there aren’t many downside risks to the dollar from today’s release and a slightly below consensus read should do very little to dent expectations on Fed tightening. Instead, CPI numbers could be the trigger for markets to make a conviction call on a >2.0% terminal rate. Most expect the USD to strengthen on today’s data.
Higher oil prices and lower volatility are providing the loonie with some modest support this morning. USD/CAD remains range bound and spot movement has been limited. Increasing financial media coverage of Canada’s vaccine mandate protests—the closure of the Ambassador Bridge to Detroit to commercial traffic amid a truck blockade—has yet to have much obvious impact on the CAD. A sustained blockade could be disruptive, add to supply constraints and weigh on Canadian exports at a time when the economy is already relatively soft. There isn’t much today on the Canadian calendar. The US CPI report will drive direction today.
Hawkish comments by ECB members poured in yesterday, as Germany’s Joachim Nagel said that the ECB has now reached a point that is a “textbook case for central-bank action”, explicitly opening the door to a hike by year-end. We have a plethora of other ECB speakers today to keep an eye on. Any hawkish comments from them should therefore make for a bigger surprise. EUR/USD has been unreactive to ECB speakers after last week’s policy meeting. After all, President Lagarde’s message was clear: the March inflation projections hold the keys to the monetary policy outlook, and markets seem to be willing to patiently wait until the Match meeting. The US CPI report can trigger a break below 1.1400 in EUR/USD today.
Yesterday, the Bank of England’s Chief Economist Pill stroked a cautious note on monetary policy, by signalling the risks to taking unusually large steps in monetary tightening. This may have held GBP back a little yesterday, amid a supportive environment for G10 currencies. Today, we’ll hear from BoE’s Governor Andrew Bailey, while the UK data calendar looks very quiet until tomorrow’s GDP figures. USD strength today could see GBP/USD test the 1.3500 February lows.
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