CAD
A quiet end to the week for loonie traders should help focus minds on next week’s key events. Topping the docket, rate decisions from the FOMC and BoC should help shine a spotlight on the continued divergence in economic conditions in North America. South of the border, growth remains strong, inflation sticky, and the labour market resilient, warranting a prolonged hold in rates. In Canada however, the opposite is true, and should see a 25bp rate cut from the Governing Council next week. If realised, we think this should help USDCAD back up toward the 1.44 level, with the pair having slipped lower this week, despite continued tariff threats.
USD
Comments from Donald Trump were once again the main focus for markets on Thursday, albeit we were a little surprised to see the dollar slide considering the content. Specifically, Trump largely doubled down on tariff threats, while also demanding lower rates from the Fed. Admittedly, when taken at face value, lower rates would be dollar-negative. But making demands of central bankers is akin to waving a red rag at a bull – a good way of encouraging policymakers to do the opposite, if only to prove their independence. With that in mind, we continue to think conditions are in place for the dollar to move higher in the coming week. For today though, barring any further comments from Trump, events elsewhere are likely to be the major drivers of action for currency markets. Granted, University of Michigan sentiment readings from the US will likely capture some attention this afternoon, but PMIs in Europe and fallout from the BoJ’s decision to hike rates overnight, are likely to be the key events of the day.
JPY
The BoJ’s decision to hike rates once again is unsurprisingly the primary story for markets as European traders head into the office this morning. The decision takes policy rates in Japan to 0.5%, the highest level seen since 2008. That said, unlike their previous rate hike in mid-2024, this latest rise in rates has not produced a further carry trade unwind – a concern in some quarters prior to today’s announcement. This morning’s decision has however seen some modest yen upside, with USDJPY now trading just north of 155.
EUR
With events in Japan proving less explosive than some had feared, that leaves European traders to focus on January’s flash PMIs this morning, and these have proven something of a mixed bag. Our bias prior to the release had been for tariff risks to weigh on sentiment. Curiously, however, activity readings improved in both France and Germany, with the latter returning to expansion for the first time since June 2024. That said, despite surprise improvement in the eurozone’s two biggest economies, aggregate readings for the bloc still managed to only fractionally overshoot expectations. Even so we suspect this news is still likely to be welcomed by ECB speakers later today, with Lagarde headlining the docket at 10:00 GMT. Given this morning’s data, we now look for a more neutral tone from the ECB Chief, leaving little on the horizon to disrupt the euro’s current uptrend, with EURUSD threatening 1.05 as of writing.
GBP
PMIs are also likely to be front of mind from sterling traders later today. That said, given the grim sentiment looming over the UK economy at present, we expect a disappointing set of prints, even as we continue to hold a more bullish view of the UK’s underlying fundamentals. If realised that would put a break below 1.18 in range for GBPEUR, levels last traded in August 2024, leaving the pound scanning as cheap in our eyes given our more constructive long-term view on the UK economy and on sterling.
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