The dollar is trading stronger across the board this morning after suffering a correction yesterday that was due to a rebound in global equities and month-end flows. This week’s key data releases will be the ISM surveys, and in particular Friday’s ISM services index, which served as a benchmark for the rapid swings in US growth sentiment over the past two prints. Still, we have some interesting data points to monitor today. The Conference Board consumer confidence indicator is expected to rise after a small contraction in January, the Richmond Fed Manufacturing Index is also expected to improve, while wholesale inventories may hold at 0.1% month-on-month in the January read. US data may not move the market dramatically today, so the dollar may be primarily driven by global risk sentiment. The dollar’s short-term bias still appears neutral/modestly bullish.
The CAD is essentially unchanged on the day. Canadian Dec GDP is expected to come in flat on the month and slow slightly to 2.7% in the year (from Nov’s 2.8%). Today's price action has been confined to yesterday's range (1.3535-1.3625) and may be the key to the near-term outlook. The most powerful directional cues may come from performance of US equities. While the market debates higher for longer in terms of policy rates, the Bank of Canada has declared a pause, which appears to put the CAD at a disadvantage compared to its peers. Observe the USD/CAD trends.
Inflation figures for January are the main highlight of the week in the eurozone, and today’s numbers out of France and Spain may already start moving the market. Unless we see a material surprise on the downside – that would suggest a more widespread easing in price pressures across the eurozone – today’s regional CPI figures may fail to dent hawkish expectations for ECB tightening. Markets are currently pricing in around 130-140bp of tightening before reaching the peak. This could offer some floor to the euro, and we expect any re-strengthening of the dollar to see commodity currencies more at risk than the euro for the time being.
The pound is one of the best-performing currencies since the start of the week after the confirmation of a new UK-EU deal on Northern Ireland. The direct impact on the UK economy should not be significant, but markets are probably welcoming the conciliatory steps in UK-EU trade relationships. From a central bank perspective, a 25bp move in March is fully in the price, and the debate appears to be much more centred on whether the Bank will need to keep tightening beyond March: markets are definitely swinging on the hawkish side, expecting a total of 80bp of tightening before reaching a peak. The pound may continue to prove more resilient than other pro-cyclical currencies in the short term
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