CAD
Despite the rally seen across European FX in recent days, the loonie has proven a notable laggard, seeing only marginal upside against the dollar. That said, we think this broadly makes sense. Tariffs should mean that the loonie trades at a discount, and that is increasingly being priced. Indeed, this divergence could have further to run given that any credible scenario would almost certainly see Canada come off much worse when compared to the US economy. Given the downward pressure on the dollar from events elsewhere, this likely means USDCAD will continue to trade around current levels in the short term. But further out, that still leaves 1.50 on the table, provided that trade tensions between the US and Canada do not ease first.
USD
After stealing the limelight over recent weeks, US policy has increasingly taken a back seat in the past few days, with European developments increasingly dominating price action. Just in the past 24 hours, the surprise news that both the EU and Germany would look to ramp up spending significantly (more on this below) has put a rocket under European FX, in turn helping the DXY index drop to just above 1.05 as of writing. Arguably this dollar weakness was not helped by yesterday’s suggestions from US Commerce Secretary Lutnick too, in which he indicated that recently imposed tariff measures could once again be suspended, if US demands were met. The backdrop for all this, however, is a market that remains concerned about US growth, and we suspect this will reemerge as a theme as the weekend draws closer. For today, the leaves ISM services PMIs as the major focus on the data front, published at 15:00 GMT, especially after Monday’s grim manufacturing prints. A repeat could well see the dollar notch lower again ahead of Friday’s now pivotal jobs report.
EUR
While tariffs had been the big news heading into Tuesday, headlines around European fiscal support ultimately stole the show. For the EU as a whole, the European Commission triggered national escape clauses from the Stability and Growth Pact. This could unlock an additional 650bn euros of national spending, with other measures totalling 800bn. Meanwhile, in Germany, Chancellor-in-waiting Merz announced a proposed reform to the debt break that would allow for a significant ramp-up in defence spending, while also floating the idea of a 500bn euro fund for infrastructure investment. This is by any measure a large chunk of additional spending, all told – a development that markets have welcomed, with EURUSD now well on its way to testing 1.07. We think a breach in this level is in play for this afternoon if not earlier, with two risk events of note coming up. ISM Services PMIs in the US could weigh on the dollar, while a speech by French President Macron could well see him follow in the footsteps of his German counterpart, a move that is also likely to be well received by euro traders.
GBP
News out of the continent not only boosted the euro yesterday, but it also saw sterling come along for the ride higher to, with cable now trading north of 1.28. On the domestic front, BoE Governor Bailey’s testimony to the Treasury Select Committee at 14:30GMT is the major risk event for today. But we suspect it will be events in the US and Europe that continue to drive sterling price action into the back end of the week.
This content was originally published by our partners at Monex Canada.