Volatility And Uncertainty Continues To Drive The USD Higher
USD - US Dollar
The theme of global monetary tightening and slowing growth continued to resonate loudly across markets. The Fed’s tightening cycle is largely priced in, but we do not see the divergence between market expectations and central bank communication that we witness in the case of other major central banks. With the Federal Reserve having largely endorsed the market’s hawkish pricing, any risk related to a material dovish re-pricing seems quite remote for the dollar. The balance of risks for the greenback remains skewed to the upside in this unstable risk environment. Further dollar gains look more likely in the short term. Data-wise, some focus will be on wholesale inventories and housing data today in the US.
CAD - Canadian Dollar
The CAD has now broken above 1.28 overnight as the USD continues to rally. Crude oil prices are softer on the session and continue to chop around the $100 point. The major drag on the CAD’s performance remains elevated volatility. It will be hard for the CAD to reflect tighter BoC policy and still relatively firm commodity prices while risk appetite remains fragile but we continue to feel that the scope for CAD losses remains limited from a fundamental point of view. Observe the USD/CAD trends.
EUR - Euro
EUR/USD traded around the 1.0636 support (2020 lows) overnight, and a decisive break below such a level would place the next key support at 1.0500. The euro’s inability to rally on hawkish comments by European Central Bank members means lingering vulnerability to an external environment negatively affected by an ever-concerning situation in Ukraine and generalized USD strength. The euro could find some support tomorrow as inflation numbers from eurozone countries start to come in, but the chances of 1.0500 being tested by the end of the week have increased.
GBP - British Pound
The pound has remained on a slippery slope, as the FX market continues to unwind long GBP positions related to the economic resilience of the UK and aggressive tightening by the Bank of England. Still, money markets continue to show six hikes fully priced in by the end of the year. We think markets may be positioning a bit too much on the bearish side of the GBP ahead of next week’s BoE meeting. GBP/USD, however, could remain vulnerable as the dollar retains some momentum. The 1.2500 support could prove a rather strong one, but further deterioration of the external environment could see that level being heavily tested before the end of the week.
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