The dollar continues to quietly reclaim some of the heavy losses seen since last October and has now reclaimed about a quarter of that sell-off. The move has clearly been driven by the re-assessment of the Fed cycle, where the 'higher for longer' camp is dominating air waves. Yesterday showed an above-consensus US January PPI release and pushed 10-year US Treasury yields further to 3.89%. The higher rates for longer thesis has also seen some substantial re-pricing of the Fed curve this month where market pricing for the December 2023 Fed Funds rate has risen to 5.10% from 4.35%.
Today we will also hear from Fed hawks Thomas Barkin and Elizabeth Bowman, plus receive an update on January import prices. We see a scenario where the USD continues to edge up. The next big input to the story will be the FOMC minutes released next Wednesday.
Rising US rate expectations in contrast to the Bank of Canada which signaled it was pausing coupled with the knock-on sell-off in US equities, are driving the greenback to its best levels in a month against the Canadian dollar this morning. The pair has reached 1.3520 and we see potential toward 1.3550, but the momentum is sufficient to raise the prospect of a move toward 1.36 in the short term. There are no major releases from Canada today, leaving the loonie to trade on broader market themes. Observe the USD/CAD trends.
The hawkish re-pricing of the Fed interest rate curve dominates markets and even though eurozone money market rates have risen too, the two-year EUR/USD has dropped to levels last seen in mid-December. We expect the pair to move toward the 1.0450/1.0500 area, which may be the strongest dollar level of the year for eurozone corporates. There is not too much on the eurozone calendar today apart from the December current account figure.
Yesterday’s comments from Bank of England chief economist Huw Pill pointed towards the BoE shifting towards a slower pace of tightening and so we look for one final 25bp BoE hike to 4.25% next month. Away from the BoE the UK press is focusing on a surprise trip by Prime Minister Rishi Sunak to Northern Ireland today. The presumption is that he is trying to win over the DUP nationalist party. We suspect sterling does not get much of a bounce were a new EU deal announced, with investors quite fatigued on this subject.
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