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Weekly Currency Update

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Is the dollar ready to skyrocket?

Is the dollar ready to skyrocket?

US dollar: Weekly Trading Range (93.80 – 95.10)

Spot
DXY 94.08
Week ahead bias
Bullish
Weekly range
93.80 – 95.10
1 month target
95.00
  • The dollar has recently pushed up to the highs of the year as both central bankers and investors re-assess both the transitory nature of inflation and what central bankers plan to do about it. Driving that re-assessment, particularly in the US, has been the hawkish Fed and surging energy prices. Data wise - Friday’s non-farm payrolls report – we look for +450-500k – is enough to keep the Fed on track to announce tapering in November and on track to tighten in late 2022. On the energy front, it will be interesting to see OPEC+ increases supply on Monday by 400k barrels per day.
  • Technically the dollar looks on the verge of a significant break-out and a strong US jobs report could cement that trend. We’ll also focus on progress on the US debt ceiling – a stopgap bill has been signed to fund the government until early December – but brinkmanship in the Senate could easily lead to a mishap for risk assets at a time when earnings expectations are being revised lower.

Canadian Dollar: Weekly Trading Range (1.2650 – 1.2800)

Spot
USD/CAD 1.2670
Week ahead bias
Neutral
Weekly range
1.2620 – 1.2810
1 month target
1.2600
  • The loonie survived a challenging week this past week and continued its appreciation benefitting from the rise in energy prices worldwide. This may continue to be the case in the week ahead, as more potential hits to risk sentiment and USD strength will likely challenge CAD’s resilience yet again.
  • Data wise, the focus will be on September jobs data, which will be released in tandem with the US NFP. Analysts expect a moderate increase in employment after August’s 90k jump tracking the recent upbeat sentiment on the Canadian economic outlook, as well as market expectations on more Bank of Canada tightening before year-end. Any headwind to CAD will come from external factors as domestic drivers are set to remain supportive.

Euro: Weekly Trading Range (1.1500 – 1.1650)

Spot
EUR/USD 1.1600
Week ahead bias
Bearish
Weekly range
1.1500 – 1.1650
1 month target
1.1500
  • Eurozone inflation pushed up to 3.4% YoY in September and core to 1.9%. The European Central Bank had expected higher inflation, but not this high. So far ECB members have been happy to assign higher inflation to transitory factors and warn against any over-reaction. This week we will here from many ECB speakers, including Lagarde and Lane. Plus, we get to see the minutes of the September ECB meeting where a ‘recalibration’ of PEPP was announced.
  • On the data front, we should get to see a broader look at the October PMI releases and some investor sentiment indicators. The week will also see how the dovish ECB stacks up against other central banks in Europe. Support for the EUR/USD pair remains at 1.1500 and may well be tested this week as long as US NFP meets or exceeds expectations.

British Pound: Weekly Trading Range (1.3400 – 1.3600)

Spot
GBP/USD 1.3550
Week ahead bias
Mildly Bearish
Weekly range
1.3400 – 1.3600
1 month target
1.3400
  • GBP volatility has been picking up since September and is now back to levels last seen in July. The market seems a little unsure how to trade GBP on the energy story and early fears of stagflation. Bad for activity but good in the sense that it makes the Bank of England tighten earlier? For the shorter term, there is a case for a multi-day move to 1.32 while 1.3570/3620 will be a tough nut to crack on the upside.
  • Given that the market now prices a 10bp hike at the November BoE meeting and another 50bp in 2022, the market will hang on the BoE’s every word.

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