Softer US data this week - including an ADP jobs release are pointing to a negative January NFP tomorrow - has slowed the Fed tightening story. But the bigger challenge to the dollar has come from overseas, particularly in Europe. Stubbornly high inflation is prompting a re-assessment of the amount of patience the likes of the ECB can show. The re-pricing of the ECB cycle is providing support to European currencies in general. Today will be all about rate meetings in Europe. A softer US ISM services index looks unlikely to move the dollar. DXY could dip to the 95.70 area should Christine Lagarde not find the right words to downplay expectations of a 2022 ECB rate hike.
CAD - Canadian Dollar
A pro-risk market mood and firm crude oil prices are CAD-supportive and point to additional CAD gains in the near-term. The CAD remains largely at the mercy of external events for the moment, in other words. Direction for the CAD will continue to be anchored to the trajectory of oil and BoC tightening process.
Two-year US-Germany sovereign yield spreads have narrowed 20bp from their peak of 180bp in late January - largely on the view that the ECB will not stand idle with CPI now above 5% in January. Market pricing places President Lagarde in a tricky position. Does she repeat her views that a 2022 rate hike is unlikely - and look blind to current price developments. Or does she somehow leave the door open for a December hike - which could see tightening expectations (probably more in 2023 now) extend? On balance, we think President Lagarde will walk the tightrope of market expectations by sticking to the December staff forecasts, which suggested the need for a 2022 rate hike was unlikely. Analysts still expect any EUR/USD spike to the 1.1360/1380 region proves temporary and would still favour a move to 1.10 into Spring.
GBP - British Pound
Market analysts suggest that the BoE will vote for a 25bp rate hike - taking the Bank Rate to 0.50%. There will also be significant interest in the BoE's inflation report and its forecast as to whether CPI is on target in two years' time using the market's very aggressive pricing (1.50% Bank Rate early next year) into account. This is where the BoE would have an opportunity to present a rate protest. With the BoE in dynamic tightening mode, we expect the GBP to trade higher against the USD in the short term.
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