A well-telegraphed jump in US inflation to 7% was taken as a “sell the fact” opportunity for FX investors, with a substantial unwinding of dollar positions triggering widespread dollar weakness. Most analysts believe that this dollar counter-trend does not have long legs, and see scope for a recovery by the end of this week as imminent Fed tightening still suggests a strong greenback this year. Today, the US calendar includes December PPI and initial jobless claims, plus a number of Fed speakers.
The loonie continues to do nothing wrong and with a lower USD across the board yesterday, the USD/CAD took another leg lower. A hike from the BoC in January starting to grow as upbeat domestic data, easing of supply chains is supporting the CAD to muti-month highs. USD/CAD is currently trading below 1.2500 with most analysts remaining bullish on the CAD.
EUR/USD extended its run and is now eyeing 1.1500. Another leg higher is rather unlikely as most expect the greenback to recover over the next few days. The data calendar in the eurozone does not include market-moving releases leaving the common currency to trade on broader market themes.
The pound only marginally lagged other G10 currencies yesterday as UK Prime Minister Boris Johnson started to face calls for his resignation from within the Conservative party following an admission before Parliament that he attended a party when gatherings were not allowed in England. The pound is not embedding any political risk at the moment as the current commentary does not look to have much of any negative implications for the GBP outlook.
A bigger risk for the GBP is associated with post-Brexit trade negotiations with the EU. UK will meet EU officials today to discuss the still unsolved Northern Ireland dispute which could escalate tensions quickly and have a material negative impact on the trajectory of the currency. On the BoE side -the market is currently pricing in an 85% probability of a 25bp rate hike at the 3 February meeting.
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