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CAD
The loonie continues to outperform post-election, with USDACD still shy of the 1.40 level. Indeed, market bias still appears to favour treating the loonie as a dollar-lite expression, rather than USDCAD reflecting building upside risks, and what a growing divergence in fundamentals between the US and Canada. This should be on show once again today, provided US CPI matches expectations. If so, we would expect to see some USDCAD upside, with a break of 1.40 on the table.
USD
Tuesday was yest another good day for the dollar. The DXY index hit its highest level since early May, while the Bloomberg dollar spot index rose reached its strongest level since 2022. Moreover, news flow through the day did little to disrupt the greenback’s inexorable rise. Neither FNIB nor SLOOS proved to be revelatory, as expected, while FOMC speakers largely played their cards close to their chests. Instead, it was election fallout and Trump trades that continued in the driving seat for markets. Today, however, US CPI should put data back in the spotlight for traders. We expect to see a 0.3% MoM core inflation print, matching market expectations. More importantly though, we think this will open the door to a much more non-committal stance from the Fed on rate cuts, seeing a further pricing out of December easing bets, in line with our base case for little to no further easing until the FOMC gains greater clarity on upside inflation risks under a Trump presidency.
EUR
While US politics once again grabbed market attention on Tuesday, we also think that developments in Europe are worthy of note on this score. Specifically, French lawmakers rejected an amended budget bill, meaning it is not just Germany that is struggling with domestic political challenges at a distinctly inopportune moment. Indeed, given this it is a little surprising to us that political dysfunction is not weighing more on the euro at present. Granted, the single currency fell to its weakest level in a year against the dollar, with EURUSD challenging the 1.06 level, but it also outperformed most other G10 FX. This morning, French unemployment data has proven a non-event for markets, with a blank docket otherwise on offer. This should keep US CPI and political risk in focus for the remainder of the session, posing further downside risks for EURUSD.
GBP
After outperforming initially following the US elections, yesterday saw the pound playing catch up. Sterling shed almost 1% against the greenback, weakening more than any other G10 currency. That said, we have a hard time just pinning the pounds slide on yesterday’s labour market release. Yes, unemployment rose by more than expected, but this is unlikely to impact policy given the longstanding issues with the labour force survey. To us, this leaves sterling looking undervalued, particularly on crosses. The BoE is likely to be amongst the slowest to ease rates, while growth remains solid when compared to European neighbours, and the UK should be relatively more insulated from trade risks when compared to the EU. In our view, this should see the pound making gains, particularly against the euro. Albeit, such a move may have to wait for the dust to settle on the US elections, and for markets to begin re-focusing on economic divergence as a key driver for FX markets.