CAD
USDCAD drifted fractionally higher on Wednesday, in line with broader dollar moves. We see little reason for this dynamic to change today either. Of note domestically, retail sales data for November tops the docket. But, given that this set of readings precedes the sales tax holiday and fiscal support, a soft set of prints looks likely this afternoon. Markets expect to see core sales growth of just 0.1% MoM, essentially unchanged from October, and consistent with the weak-to-no-growth underlying state of the Canadian economy that has been our base case for some time. If realised this should help refocus minds on the less-than-positive outlook for growth in Canada, and the loonie trading under pressure.
USD
After Mexico, Canada, China, and the EU all found themselves in Trump’s crosshairs over recent days, overnight it was Russia’s turn to experience the new President’s ire, threatening to impose further economic sanctions unless Putin comes to the table and negotiates an end to the conflict with Ukraine. From an FX perspective though, most interesting has been the lack of market reaction. The dollar barely registered the news, in contrast to the whipsaw market reaction seen in response to earlier tariff threats. If this becomes a theme, then it could well leave markets at risk of a shock come February 1st – we continue to think that tariff threats are credible, warranting a stronger dollar across the board. For now, though, market focus is on initial jobless claims later today, with PMIs on the docket for tomorrow and an FOMC meeting next week.
EUR
While Thursday’s data calendar looks light for the eurozone, tomorrow’s PMI data is likely to print soft once again. Indeed, we see significant downside risks to the January PMIs given the impact on sentiment stemming from Trump tariffs. If correct, this should see EURUSD slide into the end of the week. We look for the pair rot trade at 1.03 post PMIs, targeting 1.02 by month end on the back of Fed hawkishness and tariff threats.
GBP
Despite the pound softening at the margin yesterday, we are inclined to see domestic political developments as positive for the pound longer term. Specifically, In an interview with Bloomberg at Davos, Chancellor Rachel Reeves hinted strongly toward plans to simplify elements of the planning system in an effort to boost growth, saying that “the answer can’t always be no” when it comes to major planning decisions. These comments come ahead of a speech by Reeves next week where we expect her to set out in more detail how she intends to achieve this. PM Kier Starmer has already given an indication of the direction of travel, however, suggesting this morning that the judicial review process would be simplified – one of a number of measures we think could be announced by the UK government in coming days. Given the drag that red tape has on the ability to build anything in the UK, we see this as a welcome step in the right direction from a government that has largely struggled for momentum since taking office last year. Admittedly, having disappointed markets with her budget, Reeves will likely need to deliver more than just warm words to see a meaningful impact on sterling. But we think this is coming, not least given the government’s lack of other options to boost growth, which should be supportive of GBP outperformance later this year.
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