CAD
Today’s CPI data should be front of mind for loonie traders ahead of the release at 13:30 GMT. Consensus expectations look for 0.1% MoM price growth in January, with all-items CPI seen rising 1.9% on an annual basis. Granted, this will be accompanied by core inflation measures that are likely to appear a little sticky – core median and core trim CPI are both projected to rise 0.1pp, to 2.5% and 2.6% respectively. If realised, this could see USDCAD trading under pressure this afternoon. The pair has already notched lower this morning, having tested the 1.42 level overnight. But even if this latest CPI data does point to an uptick in price growth, we are still inclined to think the loonie should be trading weaker. After all, we suspect that the combination of a temporary sales tax suspension and fiscal support is doing much of the heavy lifting when it comes to the recent uptick in economic readings, and with tariff risks continuing to loom on the horizon, we find it hard to turn bullish on Canadian fundamentals.
USD
After tracking sideways to start the week, the dollar has notched higher this morning, with the DXY index briefly rising above 107.0 before softening marginally in recent hours. In large part, this is a function of Russia-Ukraine peace negotiations, which continue to dominate headlines. While we have been consistent in our view that any resolution is likely to be ugly, favouring a stronger dollar, markets are now starting to come to a similar conclusion. That said, we also think a post on social media by Donald Trump yesterday afternoon is also worthy of note. In it, he laid out his plans for reciprocal tariffs, which included tariffs in response to VAT and non-tariff barriers. While not new information, this would imply much higher tariffs than currently expected by sell-side consensus, which in turn broadly looks for greater impact than markets have priced, with currencies embedding little to no tariff premia at present. But we think it is significant that this remains top of mind for the President, even as the attention of traders is focused elsewhere, adding to our view that the credibility of these threats remains an underpriced risk across markets, warranting a stronger dollar.
EUR
ZEW survey expectations, released at 10:00 GMT, should be the primary data focus for euro traders today, albeit one that is likely to offer few surprises. After all, it doesn’t take a genius to work out that the German economy is struggling, and that in turn skews forward-looking risks to the upside. But it might just help focus minds on the upcoming German elections, and the ongoing Russu-Ukraine peace negotiations, and these are market-relevant themes. Moreover, we are inclined to view both as negative for the euro, considering recent price action. Markets continue to price a relatively benign election outcome in Germany – we are far less confident. In our view, a protracted and difficult set of coalition negotiations looks likely, and that should see the euro trading with a discount. Marry that to Ukraine peace negotiations, where European countries have been sidelined and where markets continue to be too optimistic in our view, we still favour a lower EURUSD in the short run, with parity in play if significant US tariffs ultimately materialise in the coming months.
GBP
Sterling starts the morning on the front foot, helped by labour market data that delivered a set of marginal upside surprises. Unemployment remained stable at 4.4% in December, matching the November print to land 0.1pp below expectations. Meanwhile, weekly earnings increased, albeit once excluding bonuses, a 0.3pp increase from the previous 5.6% 3m/YoY print was in line with sell-side consensus. That all being said, given the data quality issues that have haunted the Labour Force Survey, we are disinclined to read too much into this latest round of data. Rather, tomorrow’s CPI release should be much more significant for markets, and there we see risks skewed in favour of a weaker-than-expected set of prints. If we are right, then this latest bout of sterling strength is likely to be short-lived.
This content was originally published by our partners at Monex Canada.