CAD
Despite a modest undershoot for all-items inflation in October, we are inclined to see yesterday’s CPI report as a non-event for the BoC. Readings largely matched expectations, with marginal headline weakness offset by a fractional overshoot for underlying price growth indicators. More to the point, current Canadian inflation is not a good indicator for future inflation at this juncture. A sales tax cut, direct consumer support, and Trump tariffs are all set to muddy the waters in the coming months. With this in mind, the BoC is still likely to ease by 25bps come January in our view. But this is not the main factor underpinning USDCAD’s rise above 1.43 yesterday afternoon. Instead, it looks to us like political risks are being discounted in loonie valuations. This does, however, leave USDCAD looking more vulnerable than usual ahead of the FOMC’s decision this evening, with risks of another leg higher for the pair on the table.
USD
The FOMC takes centre stage later today, in one of the more interesting meetings in recent times. Granted, in isolation the rate decision looks like a done deal – a 25bp cut is overwhelmingly expected by economists. But inflation looks sticky, and the Fed have painted themselves into a corner over recent weeks. If it wasn’t for market pricing that implies a 95% chance of a cut, we would strongly suggest that the data favours leaving rates unchanged. How the Fed squares this circle will be the main focus for traders this evening. In our view, it should entail a significant hawkish adjustment to the rate path laid out in the Summary of Economic Projections. If we are right, then markets are likely to be caught off guard, with consensus expectations looking for 75bps of easing next year, only 25bps less than forecasts back in September. To us, this scans as too dovish in the face of upside risks from an incoming Trump administration. A more hawkish adjustment, in line with our expectations, should put the dollar on the front foot this evening.
EUR
EURUSD continues to flirt with the 1.05 level, with domestic eurozone data offering little impetus for the pair. This should all change later today though, if our expectations for the Fed are realised. A hawkish set of projections should entail a dollar rally, taking EURUSD sustainably into the 1.04s. A break into the 1.03s is not out of the question either if the FOMC really manages to catch markets off guard.
GBP
Unlike yesterday’s wage data which seemingly caught markets off guard with an upside beat, this morning’s inflation readings contained few surprises for markets. Granted, underlying inflation readings landed marginally softer than expected. But the miss relative to consensus was small, entailing only a very muted FX reaction. All told, that has left sterling to retain most of Tuesday’s gains through early trading and ahead of tomorrow’s MPC decision, where we continue to expect that rates will remain unchanged. That said, we do think sterling risks should be skewed to the downside heading into the end of the week. The BoE has previously steered markets toward 100bps of easing next year, while markets price just 57bps through to November 2025 as of writing. We see little reason for the BoE not to double down on this prior guidance in light of recent data, implying a dovish steer relative to market consensus in tomorrow’s communications.
This content was originally published by our partners at Monex Canada.