CAD
CPI and retail sales should offer plenty of entertainment for loonie traders this week. The first of these is likely to show further disinflation progress, the second, a modest but still disappointing pickup in consumer activity. Despite this, the fortunes of USDCAD are likely to be determined at the Fed this week. If the FOMC meets our expectations, a break higher for the pair should be on the cards, with levels of 1.37-1.38 not out of the question heading into next weekend.
USD
The dollar dips to start the week as risk sentiment and accelerated Fed easing bets support a continued move lower for the DXY index. This comes despite news overnight of a second failed assignation attempt on Donald Trump, with this failing to have the kind of impact on markets seen earlier in the year. Instead, traders are squarely focused on monetary policy, with several big policy decisions in focus this week. Nowhere is this truer than at the Fed, where, as of the morning, a 50bp rate cut is the base case, at least according to Fed Funds Futures. That said, a word of caution on this score. OIS pricing still indicates that a 25bp cut is marginally preferred, while large jumps in low liquidity conditions are not unusual. We continue to favour 25bps of easing on Wednesday, followed by further 25bp cuts in November and December. Moreover, we suspect that the Summary of Economic Projections will show a much shallower easing path than currently priced by markets. If realised, this should see the dollar rallying to end the week, suggesting that the current spell of greenback softness is likely to prove temporary. For now, though, overnight price action saw USDJPY briefly dip below 140, while Empire manufacturing today and retail sales data tomorrow should offer an appetiser ahead of Wednesday’s Fed meeting.
EUR
A quieter few days for the euro should be coming up after last week’s ECB rate cut. Tomorrow’s ZEW survey returns should be the major data release of note. That said, eurozone watchers will likely have their attention split between ECB speakers and the Fed this week. The former should add more colour on the odds of a rate cut next month. The latter will determine whether or not risk conditions can continue to support EURUSD at current levels. With the pair currently hovering around 1.11, we think a retracement lower is likely.
GBP
While the Fed is likely to be the focus this week, another highly contentious rate decision is due from the BoE on Thursday. Swap pricing places the odds of a rate cut at 30% this morning, a level we think fairly reflects the balance of risks ahead of the event. Indeed, we noted in our preview that the 15% chance of easing priced at the end of last week looked too low when considering signs of continued disinflation progress in the UK, and the MPC’s willingness to take a more holistic view of the data. With this in mind, we suspect that Wednesday’s CPI release will be key. Policymakers have proven highly sensitive to inflation releases just prior to rate decisions in the past. A set of prints that match expectations should at least keep a rate cut on the table – an undershoot could well make it the market base case. Even so, we think that a hold remains the most likely outcome at present, with a degree of caution warranted from the MPC. For now, though, the move in easing expectations is having little impact on sterling – the pound is up against both the euro and the dollar so far this morning.
This content was originally published by our partners at Monex Canada.