The Canadian dollar starts this week on the front foot as oil markets climb to $85.50 per barrel, but the loonie remains far from last week’s highs. A hawkish Bank of Canada meeting may tip the balance in favour of the loonie, although a further taper of the QE programme to the reinvestment level of C$1bn a week is unlikely to be marked as hawkish. Focus will be on their interpretation of when the output gap will close, with markets already pricing in a 25bps hike as early as April. Should the Bank’s language suggest the output gap will close earlier, such as H1 2022, a repricing of February’s meeting may lead to further CAD strength. After the BoC on Wednesday, August’s GDP data is released on Friday.
The dollar’s decline below the 94 handle over the past week is in line with our 1-month DXY forecasts submitted at the beginning of October. What’s notable is that the dollar’s weakness comes at a time when 5-year breakeven inflation rates – the fixed income market’s expectation of the average inflation rate over the next 5-years – touched 3%, its highest level on record. While Jerome Powell quickly batted down expectations of runaway inflation when speaking at a SARB seminar last week, heightened pressure on inflation is likely to be noted by the Fed just as they’re about to start tapering QE. This week, the focus for the dollar will return back to economic data, with the advanced reading of Q3 GDP set for Thursday at 13:30 BST, while September’s PCE data is due on Friday. There are no Fed speakers planned before the November 3rd meeting.
The euro, much like the pound, is starting this week off on a very light footing, trading only marginally higher against the US dollar at the time of writing. This week, the focus for the eurozone will remain on supply disruptions and access to energy, but will also be shared with the latest monetary policy update from the European Central Bank and the advanced readings for Q3 GDP and October’s inflation. The combination of the three economic events and the current economic backdrop will likely increase volatility in EURUSD this week, or so 1-week implied volatility suggests. While the ECB scans as the most high profile release, it is likely to be the least market moving as policy remains on hold until December’s meeting. Meanwhile, discussions around the economic backdrop are likely to be the more significant development. Given expectations are relatively muted for the ECB, the first look at the latest CPI and GDP data is likely to be more dramatic for FX price action, especially amid the latest energy concerns. The ECB is set to announce policy on Thursday at 12:45 BST, while CPI data is released at 10:00 BST on Friday along with the advanced reading of Q3 GDP.
Despite comments from BoE Governor Andrew Bailey spurring the pound on in Tuesday’s session last week, the pound closed out the week only marginally higher. This morning, sterling continues to trade in the green, but only marginally, as trading positions remain tentative. Concerns in Europe over the latest slide in the Turkish lira has meant risk sentiment is fragile lately, leading to a relatively quiet Asian session for G10 markets. Today, Bank of England policymaker, and known dove, Silvana Tenreyro is set to speak at 14:00 BST. The speech comes at an opportune time for the BoE and is likely the last form of monetary policy communication prior to the meeting on November 4th. Tenreyro is set to speak on supply chains and monetary policy, a topic that is on the lips of most economists and traders at present. Supply chain disruption is currently the reason why the BoE finds itself in its current bind of a lower growth and higher inflation environment. Later on in the week amid a fairly light data calendar, traders will be focusing on the Autumn budget presented by Treasury Secretary Rishi Sunak on Wednesday. The budget is expected to include extra funds for the NHS and a priority on levelling up the UK workforce, while fiscal consolidation is also top of mind as the extra spending priorities are likely to be paid by the latest budget windfall.