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Daily Currency Update

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The current dollar weakness seems transitory; possible reversal ahead!

USD - US Dollar

The dollar has broken lower this week on a trade-weighted basis is about 2.0/2.5% off its late November highs. Market positioning has made the dollar vulnerable early this year and has also weakened on any hints of softer inflation. The Achilles Heel for the dollar will be on the external side. The US ran a 3.7% of GDP current account deficit in 3Q21 (that's big) and China overnight has just reported that its monthly trade surplus was close to $100bn - yes, close to $100bn!

For today, a soft US December US retail sales figure may provide an excuse for the dollar to correct a little further. However, most analysts continue to suggest that any moves lower should be viewed as corrective and expect the dollar to start finding support ahead of the Jan 26th FOMC meeting.

CAD - Canadian Dollar

The CAD continues to trade below the 1.25 level, taking advantage of the broader weakness in the USD as well as higher oil prices. Markets not ruling out—but also not clearly ruling in—a January BoC hike. Most expect the USD/CAD to retain a soft tone in the near-term but remain cautious on how far the CAD can gain in the very near-term. There are no major Canadian economic data releases today.

EUR - Euro

Wednesday saw a decisive break-higher in EUR/USD, surging out of a six-month range. To the upside, 1.1500 resistance looks vulnerable - with outside risk to 1.16. The adjustment in EUR/USD looks very much like a dollar story rather than any European-centered event. The European calendar is quiet today. The euro will take cues from broader market themes.

GBP - British Pound

The UK has just released some better UK activity numbers for November, including monthly GDP, industrial production and services indices. Even the trade deficit narrowed. This suggests the UK economy might have had a little insulation heading into the Covid-restricted December period. A 25bp BoE rate hike is still priced with an 80% probability for the February 3rd meeting - which will likely keep GBP supported over the coming weeks. A move above 1.3750 resistance would target the 1.3840 area over coming sessions.

Currency Chart

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