CAD
While US inflation data is likely to capture headlines today, the BoC is also set to deliver a policy decision – one that we will be paying close attention to this afternoon. Markets currently project an 80% chance that the Governing Council will cut rates by 50bps. Economists think the decision is somewhat closer, albeit still favouring a 50bp cut rather, than a 25bp move, by a two-to-one ratio. We are off consensus on this occasion, favouring a smaller 25bp move ahead of the decision. In our view, the recently announced fiscal stimulus package should help push up growth and price pressures this quarter, encouraging a degree of caution from policymakers. That said, we think this is a close call, especially after last week’s grim set of labour market figures. But, if we are right, this should see a strong loonie rally given the heavy expectations skew in favour of a larger move in rates.
USD
November’s US CPI data should be the main focus for markets today. Consensus expectations foresee core inflation readings remaining unchanged at 0.3% MoM and 3.3% YoY, while headline price growth is expected to tick up 0.1pp across both monthly and annual readings. For the dollar, it is the impact this has on Fed rate cut expectations that will matter. Swaps currently imply an 85% chance that the FOMC trims rates by 25bps later this month. But, as we have previously noted, this looks too high in our view. Signs of inflationary stickiness, combined with upside Trump-related risks on the horizon, suggest to us that these odds should be much closer to 50-50. Given the lack of disinflation progress expected in today’s figures, we are inclined to think that an on-expectations print supports our argument, and should nudge markets towards our point of view, favouring dollar upside this afternoon.
EUR
With attention today squarely on North America, the euro should be left trading at the mercy of market cross-currents. Even so, given our expectations for US CPI later this afternoon, we see downside risks for EURUSUD on the horizon ahead of tomorrow’s ECB meeting. That is already playing out so far this morning, with the pair taking a run at the 1.05 level in early trading – a sustained break below this resistance could well follow later today.
GBP
The pound took yet another leg higher against the euro on Tuesday, despite a blank docket of events available to catalyse a move. Indeed, the cross is now trading at levels last seen in early 2022 – with a breakout from post-Brexit ranges now well within reach. Looking ahead, the UK data calendar looks light today once again. Moreover, as we have noted previously, this is the kind of environment that has favoured sterling upside in recent weeks. In our view, fundamentals suggest that the pound should be trading stronger against the euro, and with little on offer as a distraction, that is a dynamic that should continue to help traders rationalise stronger GBPEUR valuations.
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