CAD
February CPI data should be the focus for loonie traders today. Markets expect headline CPI growth to rise 0.6% MoM and 2.2% YoY, up from 0.1% and 1.9% respectively in January. That said, core-median and core trim readings are predicted to remain largely unchanged, while most analysts, including ourselves, will be paying close attention to any signs that tariff threats are impacting price growth in either direction. On this latter point, we see risks as two-sided, with no firm conviction. US data published last week showed little impact from tariff threats, but BoC survey data point to potential impacts in both directions. Given all this, we see the immediate risks for USDCAD as evenly balanced ahead of tomorrow’s FOMC meeting, which should prompt renewed upside for the pair.
USD
The dollar got off to a slow start for the week, with the DXY index dropping 0.3pp. Underpinning this fall were updated forecasts from the OECD which delivered a sharp downgrade to US growth projections, and February retail sales numbers which undershot expectations on the headline. That said, we had a slightly different takeaway from both sets of prints. First, while the OECD forecasts saw slower growth, this was in large part a function of higher policy rates in the US, with no 2025 rate cuts expected at all – much more hawkish than markets predict, and not necessarily a dollar-negative mix if realised. Second, while the advance retail sales data missed expectations, the details of yesterday’s report were solid across the board, suggesting that under the surface, consumer demand remains strong. This is yet another hard data point that pushes back on concerns of an imminent US growth slowdown, leaving the dollar looking cheap to us. Today, a vote in the Bundestag and talks between Trump and Putin should be the main events to keep an eye on. The former should pass with few surprises, while the latter holds downside risks for European security conditions, which all told, should keep the odds in favour of a greenback recovery ahead of Wednesday’s FOMC rate decision.
EUR
With little data on the docket domestically, all eyes should be on Germany today, where the Bundestag is set for a vote to approve a massive fiscal package. In terms of the key measures, this would involve excluding all defence spending above 1% of GDP from Germany’s constitutional debt break, while a fund of 500bn euros is also set to be created for additional investment in infrastructure. This would offer a huge economic boost to an economy that has been stuck in the doldrums over recent years, with broader knock-on consequences for the rest of the eurozone too, assuming the vote passes. We expect it will, based on recent reporting. That said, we also think markets are pricing close to maximum optimism in EURUSD valuations. This leaves euro risks skewed to the downside, if as seems likely, the short-term growth impetus ultimately disappoints. As we have noted previously, it will likely take some time for any additional funds to translate into meaningful growth, but yields have already climbed markedly, a dynamic that leaves activity readings primed to disappoint, particularly in the short run.
GBP
GBPUSD briefly flirted with a break of 1.30 yesterday evening, and is threatening to retest this level once again through this morning’s early trading. These latest moves leave the pair at highs last seen just following the election of Donald Trump all the way back in November. Even so, we are sceptical regarding the durability of this latest charge higher for cable. Neither the BOE decision, nor the labour market data due on Thursday, are likely to offer much upside support, while headlines covering the mini-budget on March 26th have turned increasingly underwhelming over recent days. All told, we still see sterling primed to underperform, even as the dollar recovers into month end. That leaves GBPUSD at risk of a sharp retracement lower, if our base case plays out.
This content was originally published by our partners at Monex Canada.