The USD is still struggling as investors continue to reassess the Fed outlook amid slowing US growth and inflation. While the Fed remains committed to tightening policy further, its hawkish rhetoric seems to be falling on deaf ears. In turn, this continues to weigh on US rates and yields and erodes the USD’s nominal rate and yield advantage. We continue to think that the Fed’s hawkish stance will be vindicated and the market’s expectations of a swift drop of US inflation could be put to the test before long. In turn, this should limit the USD losses over time. In the near term, however, subsiding US inflation could strengthen the market perception of slowing US growth and thus weaken the case for a USD recovery. Given that US retail price inflation has been retreating for some time now, this has been depressing US retail sales figures and today’s release may be no exception. Next to the data, FX investors will also focus on Fed speeches as well as the release of the Fed Beige Book. Should the retail sales data surprise to the upside and the Fed speakers do not surprise on the dovish side, the USD could consolidate. That said, it would take a more sustained rebound in the US rates and yields to see the USD recoup some of its recent losses.
The Bank of Canada (BoC) looks set to face a hike at next week’s (25 January) policy meeting. Signs of slowing economic activity were taken on board in the latest BoC statement and clearly emerged in this week’s BoC Business Outlook survey, where the future sales index dropped to the lowest since the pandemic and most interviewed firms said they expect a recession in Canada. However, the jobs figures came in very strong in December, with robust full-time hiring keeping the unemployment rate around cyclical lows. Canada's headline inflation was slightly softer than expected while the core measures proved stickier. The market still expects the central bank to finish its tightening cycle next week with a quarter-point move that would lift the overnight target to 4.50%. The CPI fell 0.6% last month to bring the rate to 6.3% from 6.8% in November, and a peak last June of 8.1%. The US dollar remains within the range set last Friday against the Canadian dollar (1.3320 - 1.3440). The Canadian dollar continues to lag behind the other dollar-bloc currencies. The greenback looks poised to recover in early North America back toward the 1.3380 - 1.3400 area. Observe the USD/CAD trends.