The US dollar index is sitting near the highs of the year. Overnight, we saw the release of the FOMC minutes - the meeting at which the Fed agreed to start tapering. 'Various' participants did propose more flexibility on expedited tapering and earlier tightening if inflation demanded it - but that position looks largely priced in. Yesterday's release of the Fed's preferred measures of inflation for October saw the headline and core PCE running at 5.0% and 4.1%, respectively - new cycle highs - and market pricing of the Fed cycle is staying firm. As if the dollar did not need any more help, the October trade deficit came in much better than expected at $83b - a reminder of US energy independence in what was a bad month for energy importers. Expect quiet markets today for the Thanksgiving holiday and no obvious reason for the dollar to hand back recent gains.
The CAD found a little support as crude oil recovered from early losses and US stocks rebounded but, much as we expected, gains have failed to extend much beyond the 1.2660 area and the CAD remains prone to short-term softness. While all fundamentals suggest that the CAD should strengthen, USD/CAD trends may turn choppy toward the end of the year but strengthen in the medium term as investors reward the currency for the Bank of Canada’s policy stance. Expect a quiet trading day with US markets closed for Thanksgiving.
EUR/USD has been moving lower with some momentum as the prospect of European lockdowns has only widened the Fed versus ECB tightening story. Temporary support seems to have been found around the 1.1200 area. The next support is at 1.1170 and below that, we're not getting far from 1.10 at all. This looks the state of play into December when, in the early weeks, we will see if any slowing in the relentless demand for USD funding takes some upside pressure off the dollar. Look out for a variety of ECB speakers today and also the release of the minutes to the 28 October ECB meeting. Despite the fourth wave in Europe, the ECB seems to be sticking to the view that the PEPP scheme will end in March.
The focus has moved on from GBP this week as the dollar stays strong across the board and continental Europe suffers fourth waves in the pandemic. Tensions surrounding the Northern Ireland trade arrangements seem to have and this has allowed the Bank of England's Pound trade-weighted index to hover near the highs of the year.