Global events are conspiring to send the dollar a lot higher. The Federal Reserve looks set to embark on an aggressive tightening cycle this year to stamp out inflation, the war in Europe is damaging European growth prospects, and Asia is dealing with its own growth problems. It is hard to see this environment changing in the next six months, meaning that this dollar boom looks set to continue. US data today is 1Q22 GDP, expected at 1% quarter-on-quarter annualized. More important will be tomorrow's US 1Q22 Employment Cost Indicator. Expect the dollar to stay bid on the global monetary-geopolitical configuration.
The CAD is little changed for the day, but firmer equities and crude suggest the CAD could be a touch higher after spot climbed to close over 1.2850 amid more stock market losses. Volatility has remained high, preventing a deeper rebound in the CAD in the immediate term. Because the domestic data calendar is empty of important data points ahead of tomorrow's GDP, the CAD will continue to be influenced by external variables such as risk tone, the broader trend in the USD, and month-end flows in the short term.
The FX options market assigns a 35% probability to EUR/USD trading 1.00 at any time before year-end. This is up from 25% earlier this week and just 15% a couple of weeks ago. Clearly, the spot market has driven a lot of this, but so has the rising risk premium and higher volatility currently being priced into markets. Of the many concerns facing European currencies, the most pressing is an abrupt cut-off in Russian gas more broadly in Europe. Poland and Bulgaria have seen their supplies cut off after refusing to pay in roubles. It looks like Hungary and Slovakia have agreed to pay. How this story plays out and the degree to which the eurozone economy is hit (estimates range in the 1-3% of eurozone GDP on a complete cut-off) will help determine EUR/USD levels. For today, look out for Germany and Spanish CPI figures for April.
In the face of a strong dollar bull trend, GBP/USD has crumbled. Support can be found at 1.2500, similar to the big levels of 1.0500 and 130 on EUR/USD and USD/JPY. Perhaps the only thing supporting the GBP at 1.25 is the fact that it has come a long way quite quickly. We cannot rule out the GBP/USD breaking lower, but we think this is more a dollar than a pound move.
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