CAD
While elections are in focus in Europe, in Canada it is GDP data that should be front of mind this week. Set to be released on Friday, we expect to see growth rebound sharply in Q4. Our base case looks for GDP growth of 0.5% MoM, leaving GDP growth above 2.0% YoY. This does not, however, mean we are shifting our longstanding bearish base case for the Canadian economy. As noted previously, Q4 was always likely to be a false dawn for Canadian growth. A sales tax holiday, combined with fiscal transfers, should have produced a boost to consumer spending, a point confirmed by last week’s robust retail sales figures. Indeed, it would be surprising if it didn’t. But these growth-boosting measures were temporary, and the impact should be too. We continue to expect growth to drop back in early 2025. Accompanied by tariff risks on the horizon, this should favour a weaker loonie, even if events this week likely mean a reprieve for the Canadian dollar.
USD
The dollar dipped to start the new week, with markets broadly welcoming the outcome of the German Federal elections, and no new stories of note from the White House to set off alarm bells through early trading. Taking these in order, we are broadly inclined to concur with the market assessment of Germany’s weekend poll. As of now, a CDU/CSU+SPD coalition looks most likely, and that was always likely to be an outcome that markets welcomed. Trump, however, remains a major market risk this week. Both Emmanuel Macron and Kier Starmer are set to discuss Russia-Ukraine negotiations with the President, and we suspect that neither is likely to be warmly received. If we are right, this should help to support the dollar on renewed geopolitical concerns. Tariff risks should also come to the fore, with the deadline for a suspension of levies on Canada and Mexico set to expire on March 4th. Indeed, with only a light docket of data releases in store, politics should once again be the main driver for the greenback, pointing to a choppy week of marginal dollar gains.
EUR
Perhaps unsurprisingly, the euro starts Monday morning on the front foot, markets breathing a sigh of relief regarding the outcome of the German elections. As noted in the USD section above, a CDU/CSU+SPD coalition looks most likely – arguably the most market favourable outcome possible. This leaves CDU leader Friedrich Merz set to become the new German Chancellor, though an extended period of negotiations is still needed before this is confirmed. Merz has wasted no time in signalling a change in direction for Germany this morning, however, particularly concerning trans-Atlantic relations. This, combined with the prospect of higher fiscal spending has seen the euro moderate initial moves higher, albeit EURUSD continues to trade in the green so far this morning. Short term, we suspect these two factors will be the key dynamic to keep an eye on for euro traders. While the worst downside political risks are arguably now off the table, a fractious EU-US relationship is hard to see as EURUSD positive, while the consequences of rising fiscal spending in Germany are not clear-cut either. On this last point specifically, a boost to German growth is welcome from a euro perspective. An associated rise in European borrowing costs, however, risks exacerbating pre-existing stresses, muddying the read-through. All told, we continue to think that the euro is trading rich given the background risks, with this likely to weigh on the euro as markets continue to work through the implications of the weekend’s events.
GBP
A very light data calendar should keep sterling traders focused on BoE speakers this week. Lombardelli, Ramsden, and Dhingra from the MPC are all set to hit the airwaves. That said, BoE Chief Economist Huw Pill headlines the rundown, delivering the closing remarks at the 2025 Bank of England Agenda for Research Conference, at 14:00 GMT tomorrow. For the time being, however, euro price action is broadly leading sterling moves versus the dollar. Cable opens the week higher, albeit having given back some of the initial knee-jerk climb that took place overnight, in line with euro moves.
This content was originally published by our partners at Monex Canada.