Trade-weighted measures of the dollar are consolidating near recent highs, and we suspect further volatility will be the story for coming weeks. Weighing on the dollar has been the pick-up in global activity as represented by yesterday's February PMI release from China. Also weighing on the dollar has been some aggressive re-pricing of central bank curves overseas. We have some important US data releases over the next week and key testimony from Federal Reserve Chair Jerome Powell next week which should shed a little light on the trajectory of the Fed funds rate. For today, the dollar will probably take a back seat to events in Europe (core eurozone CPI) and we doubt US initial claims are a market mover.
The "higher for longer" rate outlook in the US and Europe does the Canadian dollar no favors as the Bank of Canada is on hold. There is practically no chance that it lifts rates at next week's meeting. Heavier equity markets have taken also taken a toll on the loonie. The greenback is likely to challenge the recent highs seen around 1.3660. There aren’t any market moving data releases in Canada today leaving the CAD to trade on broader market themes. Observe the USD/CAD trends.
The re-pricing of central bank cycles has been more keenly felt in the eurozone than the US this week. That trend should be supported today with the release of February's core eurozone CPI which looks likely to exceed the 5.3% year-on-year consensus. We have had little push-back from the European Central Bank against the repricing of the cycle, which now seems to price the deposit rate above 4.00% early next year. That seems excessive, but let's see what today's release of the ECB minutes has to say. EUR/USD may well be trapped in a 1.0600-1.0700 range today.
Short-dated GBP rates have not moved as much as EUR and USD rates this week. This trend was helped yesterday by comments from Bank of England Governor, Andrew Bailey, who would not commit to further tightening which has weighed on the GBP. Today we see the release of the BoE's Decision Maker Panel survey. This survey has pointed to an easing in tight labour conditions including marginally weaker wage growth and less difficulty in recruitment. Assuming those trends continue, GBP interest rates could continue to fall behind those of the US and see some modest downside.
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