CAD
Yesterday’s CPI prints showed a greater-than-expected inflation rebound in February, causing a headache for the BoC. While some uptick in price growth had been expected given that a sales tax holiday came to an end mid-month, a headline 2.6% YoY inflation reading was far above the 2.2% consensus expectation. Moreover, with core-median and core-trim price growth also rising, against projections for little change, both traders and policymakers are left to ponder the cause of this unexpected inflation strength. It could be that tariff threats are leading to firms raising prices – and an uptick in goods inflation breadth certainly hints in this direction. But, we are not ruling out an uptick in domestically fuelled price pressures, or even a more idiosyncratic explanation, with yesterday’s data far from conclusive in our view. Hopefully, more data will shed light on this in the coming weeks, but for now, we still see USDCAD risks as skewed to the upside, especially with a Fed rate decision coming up later today.
USD
It has been a busy start to Wednesday morning for FX markets. Headlines overnight that Putin rejected a Ukraine ceasefire offer have seen European gas prices spike and sent the euro into a slump. The yen tested 150 against the dollar on BoJ dovishness following a decision to leave rates unchanged. USDTRY declined by as much as 10% on headlines that several opposition leaders have been detained. And a breakdown in the ceasefire between Israel and Hamas has been accompanied by comments from Netanyahu saying “This is just the beginning.” The upshot is that markets begin the day trading with a risk-off tone, with haven currencies favoured and the DXY index largely unwinding Tuesday’s selloff. Moreover, this should just be the beginning for dollar strength if our base case for the Fed plays out. We expect to see pushback on market easing expectations later today – with the FOMC likely to prove much more hawkish than traders currently expect in light of the current economic uncertainty. Assuming we are right, then a paring back in rate cut expectations should help the dollar to take another leg higher this evening, leaving the greenback on track to continue unwinding recent losses.
EUR
European gas prices spiked by as much as 5% through early trading, sending EURUSD sharply lower, with the pair down close to half a percent as of writing. The cause – headlines overnight that Putin has rejected Donald Trump’s ceasefire offer, an outcome that is weighing on eurozone risk conditions. That said, this is very much in line with our base case of recent weeks. We have noted ad-nauseum that any deal to halt the fighting is likely to take longer than markets expect, and ultimately prove much less positive for European security than markets are pricing at present. That realisation has now seemingly begun to dawn, albeit, we continue to see further downside risks for the pair stemming from Russia-Ukraine peace talks in the coming weeks and months. Before then, however, this evening’s FOMC decision should be the key driver for the pair, though again, this skews EURUSD risks to the downside if our expectations are realised.
GBP
While not sparking a major sterling reaction, we thought yesterday’s Parliamentary announcement on reforms to the benefits system was notable. Our base case, ahead of the event, looked for the government to underwhelm, leaving much of the detail to be set out later this month, when the Chancellor is due to deliver a mini-budget on March 26th. But somewhat to our surprise, this in fact looks like the single largest overhaul to the benefits system in a decade, hinting at a newfound radicalism that bodes well for the pound, provided it continues. This morning, the pound has nudged higher against the euro on Russia-Ukraine developments. But cable is likely to see the more marked price action this afternoon, with an FOMC decision in focus.
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