CAD
The loonie continues to grind higher against the dollar, finding little relief from last night’s FOMC decision. That said, we agree with the direction of travel, with tariff concerns warranting a higher USDCAD rate. Indeed, this message should find further support in today’s CFIB business barometer released at 11:00 GMT, which if realised, should help keep the loonie in retreat ahead of tomorrow’s retail sales data that closes out the week.
USD
At first glance, yesterday’s Fed announcement appeared to skew dovish, somewhat to our surprise. Granted, the FOMC held rates unchanged, as expected. But the decision also saw no change to the Committee’s rate projections, against widespread speculation looking for a hawkish upgrade, while an agreement to reduce the pace of QT also came earlier than many had anticipated. Indeed, markets reacted to last night’s events by pricing in close to half an extra rate cut for 2025. On further consideration, however, we have a different view. First, we are inclined to take at face value Powell’s assertion that the decision to pare back QT was not related to monetary policy. Second, although the FOMC’s projections remained broadly unchanged, the tone from Chair Powell in the press conference offered minimal sense of urgency when it came to cutting rates. Rather he emphasised that the hard data remained solid, while also pointing to an increase in uncertainty stemming from tariffs, in line with our own pre-announcement expectations, and a somewhat more hawkish perspective than indicated by the lack of headline takeaways.
It was also interesting, however, that when asked if a tariff-induced inflation shock would be transitory, Powell responded by saying “that is the base case”. He noted that inflation expectations remain well anchored according to most surveys, dismissing the recent uptick seen in the University of Michigan survey. This is significant given that Fed research suggests looking through a tariff-induced price shock, provided this is true. But, given our view that tariffs will likely be higher and broader than most sell-side desks anticipate, we also see greater risks that these price rises are embedded in longer-run expectations. Moreover, with a Fed cautious of repeating prior mistakes, and seemingly disinclined to start easing again until this is obvious one way or another, we see little reason to alter our call for no rate cuts in 2025. That poses upside risks for the dollar as the year progresses, even if the FOMC’s wait-and-see approach underwhelmed markets last night. We suspect we are not alone in this view either, with the dollar starting this morning on the front foot ahead of a busy day of central bank meetings in Europe.
EUR
With the greenback ticking up this morning as traders continued to assess yesterday’s FOMC meeting, EURUSD begins the day trading under pressure, having slipped 0.3% since midnight. That leaves the pair trading just shy of the lows recorded just prior to yesterday’s Fed decision, albeit we suspect that this is not entirely driven by a reassessment of the Fed. Rather newly unveiled EU spending rules, suggesting countries could only increase defence spending by 1.5% of GDP relative to current levels, have put a significant dampener on eurozone growth optimism, and by extension, European FX. Looking ahead, the focus for euro traders this morning, is on ECB President Lagarde, and rate decisions from the Riksbank and the SNB. The first of these is likely to echo Powell’s uncertainty and non-committal stance, with the latter two set to pivot hawkish in light of rising inflation, an outcome that should see the euro come under pressure on crosses as the morning continues.
GBP
The BoE is naturally the focus for sterling traders today. That said, we expect a snooze fest when the MPC’s latest decision is announced at 12:00 GMT. Policymakers have largely endorsed current market pricing for Bank Rate cuts, and there seems little reason to rock the boat. To us, that suggests an 8-1 vote split in favour of leaving rates unchanged is most likely, with the MPC hoping to leave markets, and by implication sterling, relatively undisturbed today.
This content was originally published by our partners at Monex Canada.