The dollar is consolidating near recent highs. Hawkish testimony this week from Fed Chair Jerome Powell has seen market pricing of the terminal Fed rate push up to 5.65% for a peak in September. This is a far cry from the Fed disinflation recovery story that drove the dollar 10% weaker between November and January. We cannot really look for a broad dollar decline until that disinflation story returns. This looks more like a story for the third quarter now. Before that, however, the market will take great interest in US activity and price data - hence the strong interest in tomorrow's US jobs number. More on that tomorrow. Expect USD to stay supported into the US nonfarm payrolls tomorrow. We doubt the dollar will turn substantially lower ahead of the 22 March FOMC meeting and indeed there is an outside risk that USD could push to new highs against the G7.
As widely expected, the Bank of Canada stood pat, leaving the overnight target rate at 4.5%. Amid the more general theme of "higher for longer" the Canadian dollar was punished for the less aggressive posture and the Canadian dollar was the weakest of the G10 currencies, losing about 0.25% to fall to new four-month lows. The central bank's statement recognized the tightness of the labor market, and the need for inflation expectation to ease some more, but concluded that on balance the economy is evolving as expected. The market continues to remain in flux and tomorrow's jobs report are an important data point. There remains a strong possibility that the USD/CAD could decisively break 1.3800 decisively over the next few days.
The ECB’s hawkish turn since late last year has certainly provided support to the euro in the face of higher US rates. The ECB's trade-weighted euro is now up close to 5% from the lows seen in late August. Lower natural gas prices have certainly helped. For the time being expect EUR/USD to trade in a 1.0500-1.0600 range and tomorrow's US jobs report will determine whether it needs to break below 1.0500.
UK Monetary Policy Committee (MPC) member Catherine Mann's comments from earlier this week are resonating in FX markets. She said GBP risked coming under pressure from hawkish policy overseas. Hawkish Fed remarks this week have taken their toll on GBP/USD which has traded down to 1.1800. We’ve also highlighted the outside risk of GBP/USD trading down to 1.1650. This certainly looks like the direction of travel looking at the stronger Fed policy trajectory.
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