CAD
In Canada, it should be retail sales that are the major focus ahead of the weekend. Markets look for a sharp rise in consumer spending, with a 1.6% MoM jump in sales forecast. Even so, we would be very cautious about overinterpreting this set of prints. As we warned toward the end of last year, the holiday period was likely to see a false dawn for the Canadian economy. Specifically, temporary consumer support should have led to an increase in spending – indeed, if it did not, that would be a surprise. In fact, we are inclined to see market consensus as a little too bearish given the pickup in other recent indicators. With this in mind, we see loonie risks skewed to the upside today, even if we doubt this is set to last as the impact of temporary measures wears off.
USD
To us, yesterday’s dollar slide looked at odds with fundamentals. The DXY index dropped from 107.20 to 106.40, despite little by way of data or Fed commentary to drive such a move. Granted, rising BoJ easing bets helped weigh on the broad dollar at the margin. But we see little reason for the greenback to be trading weaker against the euro or sterling, especially considering the evolution of Russia-Ukraine peace talks and the looming risk of tariffs. Markets continue to trade the former far too optimistically. The latter, meanwhile, has seemingly faded as an immediate concern, somewhat to our surprise, even with Trump’s temporary suspension of levies on Canada and Mexico set to expire in less than two weeks. Marry that to German elections at the weekend, where traders remain complacent over the likely difficulties in forming a governing coalition, we continue to see plenty of reasons for a greenback recovery in the coming weeks, even with recent price action.
EUR
Our base case continues to favour a weaker euro, and this morning’s PMI numbers have done much to support this view. In short, positive seasonal factors have failed to offset some pretty weak underlying fundamentals. Manufacturing on the continent remains in contraction, while a sharp fall in the French services reading is particularly notable. All told, this left the composite eurozone PMI to land at 50.2, unchanged from January and indicative of stagnant private sector growth. This is hardly a positive for the bloc after some suggestions that green shoots were beginning to emerge – a fact that is doubly true when considering that German elections are being held at the weekend, and tariffs loom large on the horizon, both of which pose short-term downside risks. With this in mind, we continue to think that EURUSD parity remains in play, with the pair’s recent rally an aberration, rather than the start of a more sustained recovery.
GBP
As with the eurozone, PMIs should be in focus for the UK today. Unlike the single currency, however, we think the PMIs are likely to prove much more positive for sterling. After all, they should also benefit from seasonal adjustments that pump up the readings. But the UK economy is more isolated from Russia-Ukraine risks, and the domestic political backdrop should be less of a concern. Moreover, we would also note that this morning’s retail sales data proved better than expected, with January retail sales growing 1.7% MoM. Admittedly, some of this unexpected strength came from a downward revision to the December readings. But the pickup in consumer demands tallies with last month’s PMIs and should continue given robust real wage growth in the UK. All told, we think that puts 1.27 in play for cable in the very near term. But beyond this, the outlook for the pair remains skewed to the downside into the back end of Q1, given our base case for the dollar.
This content was originally published by our partners at Monex Canada.