CAD
USDCAD continued to slide on Thursday, with a further paring of tariff risks helping to catalyse this latest move lower. Given our longstanding view on the credibility of Trumps, tariff threats, we think this is yet another move in the wrong direction for the pair. Moreover, with only manufacturing sales data to contend with domestically this afternoon, that should leave the pair primed for a retracement higher if our expectations for US retail sales data are realised.
USD
The dollar slipped markedly through Thursday trading, a move that saw DXY drop to just shy of 107 – it had started the day around 108. This leaves the index trading at lows not seen since last December, with yesterday’s decline underpinned by a combination of factors. First, Russia-Ukraine peace talk rumours offered a boost to risk-sensitive FX, particularly in Europe. Second, emerging details on retaliatory US tariffs proved much less concerning than initial headlines, with the White House signalling that any such measures were still months away. Finally, US PPI data for January softened by more than expected across several key components, meaning that the Fed’s preferred PCE inflation indicators will come in much softer than markets had feared following hot CPI readings earlier this week. That all being said, we think the dollar now looks distinctly cheap at these levels.
As we have noted previously, peace negotiations are likely to prove challenging, and much less positive for risk conditions than markets currently expect. Tariffs, meanwhile, are still coming, and are an underpriced risk by FX markets. And despite yesterday’s PPI readings, the real takeaway from January’s inflation data should be the growing indications that merely the threat of tariffs is leading to price markups, and that should be a concern for Fed policymakers. Put all this together and we think the greenback should be trading much stronger. The most likely short-run catalyst for greenback recovery, however, comes with this afternoon’s retail sales data. Market expectations are low, with only a 0.3% MoM increase in core sales anticipated, setting a low bar for the data to beat. If it does, and we see risks skewed in that direction, then the dollar should be retracing some recent losses headed into the weekend.
EUR
While US retail sales should be the main event for today, eurozone GDP and employment data for Q4 provides an appetiser this morning at 10:00 GMT. Markets expect to see economic activity flatlining into the end of the year, while growth for 2024 as a whole is predicted to be just 0.9%. Admittedly, having seen national readings over recent weeks, we doubt that today’s data will be contained much by way of a surprise. But it should confirm that economic conditions in the bloc remain anaemic, and that is before any tariff impacts are felt. In our view that warrants a move back to parity for EURUSD in the coming weeks, despite the pair climbing above 1.045 yesterday.
GBP
A blank data calendar to end the week should keep sterling traders focused on upcoming events, and on crosswinds from US developments. Given our view on the dollar, that should leave cable risks skewed to the downside today. But we see little scope for upcoming domestic events to offer much support for the pound either with both CPI and labour market data for January coming up next week, despite our longer-term bullish view on sterling.
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