CAD
At first glance, yesterday’s inflation data release looked hot. While headline price growth matched expectations at 1.9% YoY, core median and core trim both rose to 2.7%, above consensus estimates that projected readings of 2.5% and 2.6% respectively. As we noted in response to the January CPI report, however, this is a little misleading, given the impact of a temporary sales tax (GST) holiday and a dose of one-off fiscal support to households. Core median and core trim CPI readings both adjust for the impact of tax changes. But, these still capture the impact of higher demand stemming from these policy changes. With this in mind, we are sceptical that the rise in core inflation readings seen yesterday points to a strengthening in underlying inflation pressures, despite the consensus beat. Indeed, this sentiment was broadly reflected by the loonie, with USDCAD largely unchanged on the day.
USD
Russia-Ukraine peace talks are once again dominating headlines this morning. Moreover, as previously noted, this is a backdrop that should favour dollar upside. We struggle to see how any peace deal that is acceptable to Russia will be positive for European security. That means that either these talks will go nowhere, and the war will drag on requiring an unwind of the recent optimism-fuelled euro bounce, or markets need to begin discounting European FX valuations for the risk of broader conflict and the cost of trying to deter it. While it may take some time for markets to come to this realisation, either way, the dollar should be trading stronger, particularly against European FX. Beyond this, FOMC meeting minutes are the only other event of note scheduled for today. That said, we suspect these are likely to be treated as dated by markets considering the whirlwind of events that have taken place since the January Fed meeting, which should keep the focus for traders squarely on political developments if we are right.
EUR
A light docket of data releases should leave the euro untroubled today. On the central bank front, the only event of note is a speech by the ECB’s Panetta in Rome. All told, this should do much to keep market attention on Russia-Ukraine peace talks, a dynamic that we see favouring the EURUSD downside ahead of Friday’s PMI reports and German elections on Sunday.
GBP
January inflation data, published this morning, offers a mixed bag for sterling traders. On the one hand, headline inflation rose by more than expected, climbing from 2.5% YoY to 3.0%. On the other, services price growth proved more muted – having been expected to jump from 4.4% YoY to 5.1%, the data marginally undershot expectations, landing at 5.0% flat. As it happens, we think this does a good job of capturing the competing forces buffeting the UK economy. Domestically, conditions continue to normalise below the surface, but global factors are buffeting the economy, and these are dictating the narrative from a market perspective. This point was broadly made by BoE Governor Bailey yesterday, a fact that has kept sterling traders cautious this morning. The pound is trading broadly unchanged against both the dollar and the euro.
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