The dollar has essentially erased all the post-FOMC losses after markets questioned the hawkish rhetoric by the ECB. It’s been clear that markets have doubted both Fed Chair Jerome Powell’s and ECB President Christine Lagarde’s attempts to hang on to hawkish communication, although dovish bets on the Fed appear more strongly founded at this stage. Monetary policy aside, markets will continue to focus heavily on data. Today’s non-farm payrolls release in the US brings mostly downside risks for the dollar. A tight jobs market has already been factored in by the Fed (Powell even admitted inflation might fall without hurting employment), but it’s really the declining inflation story that is suggesting a peak in Fed funds rates is imminent. Accordingly, markets may focus more on the wage growth figures rather than the headline employment print. Any evidence that wage growth is losing pace and/or that hiring is slowing down materially would likely fuel rate cut expectations further, and hit the dollar. ISM service numbers will also be closely watched after the latest release was a key driver of the negative re-rating in US growth.
The US dollar is recovering from the 1.3260 low approached yesterday and traded to almost 1.3375 today. The CAD gains are hard to come by and are easily conceded even if movement is driven mainly by external factors. The hot run in Canadian data releases may be starting to cool off and any significant upside CAD risk seems to be limited. Look for the CAD to be driven by external factors this morning. Initial support now is seen in the CAD1.3300-20 area for today. Observe the USD/CAD trends.
Should today’s payrolls trigger a dollar contraction, the euro may emerge as a laggard in the G10 space. Markets are strongly questioning the ability of the ECB to keep hiking at a “stable” pace beyond the March meeting. We remain of the view that at least 75bp of extra tightening will be delivered by the ECB, which still puts EUR/USD in a position for a big rally in the second quarter – when US short-term rates may come off more steadily. Today, the balance of risks is still tilted to the upside for EUR/USD as US jobs data will be the key driver. The question is how comfortable markets are with re-testing 1.1000: we suspect a break above that level is a bit premature unless US figures come in very weak.
The Bank of England hiked rates by 50bp yesterday, but offered a number of signals that it is close to the peak. A key hint that the MPC is laying the groundwork for the end of its tightening cycle is that it has dropped its pledge to raise rates “forcefully” (i.e. by 50bp). We still doubt this was the last hike of the cycle, and expect another 25bp move at the next meeting in March. It appears that the BoE is not diverging much from market expectations, which means that it may be up to data in the UK to drive any large swings in the pound rather than surprises from the BoE.
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