CAD
In line with the greenback strength seen on Wednesday, USDCAD once again tested 1.44 before easing back through the evening. That said, given our call for further dollar upside, we think it is only a matter of time before this resistance is breached and the pair is on its way to 1.45. That move could come as soon as tomorrow too. Both US and Canadian jobs reports are due simultaneously and are likely to paint a contrasting picture of economic conditions on either side of the border, with further economic divergence favouring a weaker loonie.
USD
The dollar continued to rally on Wednesday, leaving the DXY index to close out yesterday’s trading up by 0.3%. That said, we are a little surprised that the greenback failed to make further headway – the day’s big event, namely FOMC meeting minutes, scanned as hawkish relative to market rate expectations in our eyes. Granted, the language on offer was little different to that heard in Chair Powell’s December press conference. However, given our view that the final policy decision of last year likely presages an extended policy hold from the Fed, we continue to see the scope for policy expectations to readjust higher and support a stronger dollar in the coming days and weeks. Short term, however, the focus for traders now shifts back to the state of the US labour market. Challenger job cuts today should provide an appetiser for tomorrow’s nonfarm payrolls print, where a reading of 165k is expected. If realised, this should help sustain the greenback’s current grind higher into the weekend.
EUR
With the greenback on a charge, EURUSD continued to slide yesterday, a move that has seen the pair test 1.03. While today’s data calendar is relatively light on the European front, we suspect that momentum should keep the euro tracking lower against the dollar too – our base case sees the pair ending January around 1.02 before a break below parity next month. That being said, risks to this call look skewed to the downside on the back of Trump tariff threats. We think the point of maximum concern is likely to come in February, when a raft of announcements from the new US administration is set to coincide with German elections. But with inauguration day fast approaching on January 20th, there is a risk that this could come sooner than we currently expect, and given current price action, we would not rule out a test of parity before month’s end.
GBP
Despite FOMC meeting minutes out of the US, it was sterling that captured market attention yesterday, shedding close to 1% against the dollar. The pound’s slide has continued this morning too, with cable having given up a further 0.75% to leave the pair trading at its weakest level since November 2023. This bout of sterling weakness is even more curious given the lack of an obvious catalyst. Admittedly, some in markets have pointed to the divergence between the currency and yields as a signal of market concern. The former continues to fall as the latter is rising – a dynamic that has drawn comparisons to market behaviour that occurred under the Truss administration. But this pattern is not unique to the pound, stemming from expectations for Trump’s new government, rather than being a sterling-specific phenomenon. With this in mind, we are biased to think that the pound should bounce back in the short term, as markets unwind what to us looks like an overreaction.
This content was originally published by our partners at Monex Canada.