CAD
The loonie continues to struggle to break out of recent ranges, with USDCAD currently trading in the mid-1.43s – only half a percent lower than it started the month. This is despite a volatile backdrop of market-moving events, and in contrast to our call for the pair to be trading significantly higher. That said, if the Fed meets our expectations later this week, this could well change. A paring back in Fed rate cut expectations would not only see rate differentials widen in favour of USDCAD upside, but a move lower for equities is also likely, which should help compound this dynamic.
USD
The dollar starts the week treading water ahead of a busy few days for traders. While tariff headlines have faded into the background for now, news that Trump and Putin are set to talk on Tuesday should put Russia-Ukraine back in scope for markets. Moreover, in line with our longstanding view, we do not see this as a risk-positive development. Trump is more likely than not to make concessions that undermine European security – a scenario that we think favours a stronger dollar at the expense of European FX. However, the main focus of the week is likely to fall on Wednesday’s FOMC rate decision. Markets are looking for reassurance from Chair Powell after a ramp-up in concerns around the resilience of the US economy. We think that is exactly what traders will receive on Wednesday evening. After all, the labour market remains solid, inflation sticky, and there are few signs in the hard data that the economy is set to slow sharply, even if it is cooling at the margin. That said, we think this leaves plenty of scope for traders to be disappointed too – anyone looking for a Fed put is likely to be sorely disappointed. As we see it, the balance of risks favours the FOMC pushing back on market expectations that prefer three rate cuts in 2025. Indeed, we see a very real chance that the SEPs indicate just one rate cut when they are unveiled. If realised, this should help unwind some of the recent price action that has weighed so heavily on the greenback.
EUR
With no central bank meeting and a relatively light data calendar coming up, the euro would ordinarily be expected to take a back seat for the week given the packed roster of events elsewhere. We do not expect that to be the case this week, however. In Germany, the Bundestag is expected to vote on Tuesday to approve a spending package that includes a relaxation of Germany’s constitutional debt break, and a special 500bn euro investment fund. And, with markets having already priced close to maximum optimism on increased government spending, we now see euro risks skewed to the downside. Suggestions that “We will have to cut costs on the federal level, on state level and in local communities,” as offered by Merz over the weekend, and a challenge to the spending packing in the Federal Constitutional Court by members of the FDP, received on Sunday, both give us pause. As we see it, there is plenty of scope for the final shape of this package to underwhelm markets, and that is not a euro-positive environment.
GBP
Despite the MPC being set to deliver a rate decision on Thursday, with jobs data also due the same morning, we suspect the focus for sterling traders this week will be on any leaks from the government regarding the upcoming mini-budget on March 26th. Indeed, headlines over the weekend suggested that the Chancellor was set to pivot on freezing some disability benefits in real terms, in line with our base case for Rachel Reeves to underwhelm yet again. This is likely to keep the pound trading under pressure as the week progresses, with the state of the public finances once again front of mind for sterling traders.
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