The dollar moved in line with market expectations yesterday, strengthening across the board after Wednesday’s sell-off. We should see a fresh focus on the US inflation story today as November CPI numbers are released with markets expecting headline inflation to push towards the 7% level. There is likely some room for the dollar to rally further if the headline rate breaks above 7%, while we see contained downside risk for the greenback in case of a below consensus read. Inflation would need to drop quite sharply before the market can reasonably price out the Fed tightening cycle in 2022. Most still expect the dollar to remain generally supported into next week’s Fed meeting.
With the BOC not being hawkish this week, and no communication from the BoC around the timing for lift-off, the excitement we saw in USD/CAD earlier in the week has petered out. Overall whilst there is no more fuel on the fire in terms of policy, there’s still a good chance that the first-rate hike by the BoC may be earlier than the middle of next year. Having said that, clearly, the USD/CAD is trading on expectations of any rate hikes being pushed out to mid-2022. Expect the USD/CAD to rally closer to 1.28 for an eventual move lower.
We have seen a confirmation that markets feel quite uncomfortable with levels of EUR/USD above 1.13, with the pair that stalled at 1.1350 first and now marginally below 1.1300 again. Most analysts don’t expect any upside for the euro into next week’s ECB meeting. Expect the euro to retrace and give back some of this week’s gains as we close out the year.
GBP has held up well over the past two sessions after the contraction induced by new Covid restrictions in the UK. This suggests that GBP was already pricing in negative factors given the contained FX reaction to the below-consensus growth and industrial production numbers this morning. Data should remain in focus in the UK - an increase in inflation may impact GBP although that may happen mostly through a change in 2022 rate expectations. Markets are pricing in a non-event BoE meeting next week.
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