CAD
The Bank of Canada trimmed rates by 25bps in yesterday’s latest policy decision, matching consensus expectations and our own pre-announcement call. That said, with this decision close to being fully priced ahead of the event, the initial market reaction has been muted, with USDCAD largely trading in line with pre-announcement levels. Perhaps unsurprisingly, the commentary accompanying the decision focused heavily on the potential impact of any US tariffs. We think is notable, however, that the BoC is placing significant emphasis on the two-sided risk that any tariffs could pose to inflation, while simultaneously dropping any semblance of forward guidance. To us, this degree of caution is unwarranted. If, as we expect, a US levy on Canadian imports is imposed, this would do significant harm to Canadian growth, a point noted by the BoC. But a rising output gap under such a scenario should be the main concern and would do much to absorb any inflation pressures stemming from trade disruption and a weaker loonie.
Given our longstanding bearish view on the Canadian economy, and on tariff impacts, we still expect further easing from the BoC, even if policymakers aren’t ready to admit this yet – we continue to think that USDCAD could hit 1.50 in the coming months, provided broad US tariffs are indeed implemented, as indicated by Donald Trump. All eyes now turn to the White House, with the President having threatened tariffs on Canada as early as this weekend.
USD
While yesterday’s FOMC policy statement was unambiguously hawkish, Chair Powell’s press conference was anything but, an outcome that led the DXY index to end Wednesday trading below the 108 level. Granted, markets had seen little risk that the Fed would do anything other than maintain rates at 4.25-4.50% yesterday, seemingly reducing the scope for a surprise. But the statement accompanying the decision saw labour market conditions characterised as “solid”, rather than having “generally eased”, while the FOMC has also removed a reference to inflation making progress toward the Committee’s 2% objective, now saying just that it remains “somewhat elevated”. Chair Powell, however, described this change in tone as an effort to clear up the language in the policy statement, an assessment that rings a little hollow to us. The FOMC did not simply alter their language – they made a fundamentally different point.
This dissonance was on show more broadly throughout Chair Powell’s press conference too, with the Fed chair struggling to explain why the FOMC was holding rates in light of sticky inflation, while simultaneously arguing that policy was some way from neutral, and that inflation would continue to cool. In our view, this reflects a tension amongst policymakers stemming from the likely impact of policy changes by the Trump administration. These should be inflationary, but the FOMC cannot officially make policy on that basis before any changes are formally announced, leaving Fed policymakers with some tricky messaging to handle. Powell struggled last night, but with the Fed blackout coming to an end, we expect other FOMC members will be less tight-lipped in the coming days, which should help support dollar upside if we are right. Before then, however, US Q4 GDP readings this afternoon could hold some downside risks for the greenback, especially after yesterday’s significant downward revision to the Atlanta Fed’s GDP tracker.
EUR
With the FOMC now in the rearview mirror for markets, the ECB takes centre stage this afternoon. A 25bp rate cut should be a done deal. And, if history is anything to go by, Lagarde is also likely to say little to upset markets. Admittedly if she does offer a steer, we suspect it will skew dovish relative to prior commentary. But our base case ahead of the meeting is for yet another snoozefest and an unmoved EURUSD. Before then, a handful of data prints are also set to garner some attention, with some national Q4 GDP figures and January CPI prints due today. We are inclined to think these could underwhelm, at least based on the French data seen in the past hour, which could put the euro on the back foot ahead of the ECB’s announcement.
GBP
While yesterday’s speech by Rachel Reeves had been widely anticipated, the content ultimately proved underwhelming. Most if not all of the headline measures were trialled ahead of the event, and the Chancellor failed to offer anything concrete when it came to efforts outside London and the Southeast. That said, the bar to exceed expectations was low ahead of the event, and we think Reeves exceeded it – at least, she managed to sound positive about the outlook for the UK economy, in contrast to much of her prior rhetoric. This change in tone helped the pound to make some marginal gains on Wednesday versus the euro, a trend we think should continue if the Chancellor can continue to flesh out her plans.
This content was originally published by our partners at Monex Canada.