The 2023 narrative was meant to be about US disinflation and China re-opening playing a major part in the broad dollar decline. That has not been the case. USD strength also comes at a time of the year when the dollar is seasonally strong (February and March) and the bar to put money to work outside of 4.50% yielding overnight dollar deposits is not particularly attractive. Yesterday's US fourth quarter GDP revision saw the core deflator revised up to 4.3% annualized, from the 3.9% originally reported, and today should see the January core PCE deflator at a sticky 0.4% month-on-month increase. In other words, the US disinflation/bearish dollar narrative will find little from today's data. Look for USD strength to remain over the coming weeks.
The US dollar is firm against the Canadian dollar at the upper end of this week's range as it edges closer to 1.3600. It has held slightly below yesterday's high around CAD1.3580. The greenback has not traded above CAD1.36 since early January and a move above there would target the year's high (~13685). A soft risk-taking environment coupled with central bank's pause while expectations ratchet up elsewhere are taking a toll on the Loonie. It has fallen for three of the past four weeks and is unlikely to change course anytime soon. Observe the USD/CAD trends.
Yesterday's revisions to eurozone January inflation saw core inflation revised to a new cycle high of 5.3% year-on-year. A core view slowly permeating through the market is that the ECB has perhaps another 100bp+ of tightening to do and will be leaving rates at those high levels throughout a large chunk of 2024. This should be a key factor in keeping EUR/USD supported on a multi-quarter view. The eurozone calendar is light today, but given the dollar bid on the back of US data/geopolitics, the EUR/USD bias looks to a press of 1.0575 support and a potential move to 1.0500.
Following on from Tuesday's strong PMI release, the UK outlook has received another boost today in the form of a big jump in consumer confidence. This has now returned to levels not seen since last April. This will also make the Bank of England's life harder as it seeks to cool aggregate demand to soften inflation. Markets are now quite comfortable in pricing the BoE's Bank Rate at 4.50% at the end of this year – pricing 25bp hikes in March and May. We think support levels at 1.1850/1950 may hold over the next couple of weeks.
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