CAD
Canadian inflation data, published tomorrow, should be front of mind for loonie traders. Consensus expectations are looking for 0.1% MoM price growth in January, with all-items CPI seen rising 1.9% on an annual basis. Admittedly, core median and core trim CPI are projected to be less favourable for the BoC, with both rising 0.1pp to 2.5% and 2.6% respectively. But in our view, this should not detract from the fact that the Canadian economy faces significant headwinds. Underlying growth remains soft, inflation pressures low and Trump tariffs loom on the horizon. As such, while we see risks that USDCAD notches lower tomorrow on a relatively benign set of prints, we still see fundamentals skewed in favour of a higher range for USDCAD.
USD
After sliding through the week just gone, the dollar starts Monday morning on a more stable footing, with the DXY index tracking sideways just shy of 107. This leaves the greenback scanning as cheap in our eyes, with risks favouring a retracement higher. FX pricing implies minimal tariff risk premia at present, even as we suspect markets are embedding peak optimism over a Russia-Ukraine peace deal, both factors that should be a drag on the greenback. Meanwhile, there seems little scope for the broad dollar to slide further, with Fed easing expectations underpinning valuations. Swaps imply 1.5 rate cuts this year – we suspect less will ultimately delivered in light of inflationary stickiness. A move lower for the dollar from this point would likely require a fundamental reassessment of US growth exceptionalism, or a bout of immaculate disinflation, neither of which looks likely to us in the immediate future. That all being said, this week may be a little too soon for a dollar recovery. On the release front, FOMC minutes top the docket, and are likely to read as somewhat dated. That leaves dollar fortunes in the hands of Donald Trump once again this week, a dynamic that is highly unpredictable, but one that should be greenback-positive on balance.
EUR
After briefly testing 1.05 on Friday, EURUSD is trading marginally shy of recent highs as the new week kicks into gear. And, at least to start, we see little on the horizon that will drag the pair back to more reasonable levels. Trade balance data is hardly likely to set the world on fire this morning, while ZEW expectations readings tomorrow are also unlikely to offer much new insight into the state of the European economy. That said, we do think that PMIs on Friday are worth keeping an eye on. Seasonal adjustments have been a notable upside support in recent years in February, and we suspect this time around will be little different. This skews the balance of risks in favour of an upside beat, albeit one that hides continued underlying economic weakness. Even so, whether the euro can pick up support into the weekend is also likely to hang on German elections, set to take place on Sunday. Markets are seemingly positioned for a relatively benign outcome at present, and that looks optimistic to us. We think the results are likely to be messier than anticipated, and that warrants additional political risk premia priced into euro valuations.
GBP
Unlike the US and the eurozone, it is set to be a very busy week from a UK perspective. Not only are traders set to receive flash February PMIs on Friday, but labour market data, CPI, and retail sales are also due on Tuesday, Wednesday, and Friday respectively. But we think it is inflation data that should be key to sterling fortunes this week. After all, markets are looking for a -0.3% MoM change in prices, which if delivered would be the smallest fall recorded in January since 2011, excluding the pandemic period. We see risks skewed to the downside on balance, and that would weigh on the pound if realised. As such, while we remain long-term sterling bulls, we are still anticipating the pound dipping lower over a tactical horizon.
This content was originally published by our partners at Monex Canada.