USD
After rallying through Friday afternoon, the dollar starts the new week making further gains against the rest of the G10 complex. Commentary over the weekend for the US has seen markets continue to price in tariff risks, with this supporting another leg higher for the dollar. This week, the main data event comes in the form of US CPI data, released Wednesday, accompanied by a whole raft of Fed speakers. To us, this mix is interesting, given that it gives cover for the FOMC to dial back their rhetoric on rate cuts, without having to explicitly signal that this is a result of upside inflation risks posed by the incoming Trump administration. Whether or not Fed speakers choose to take this opportunity should be the key determinant for how the dollar trades this week in our view. We see risks skewed towards a moderately more hawkish skew in Fed commentary, which should help keep the dollar supported.
EUR
Early trading is seeing EURUSD making a new run at the 1.07 level this morning, despite a relatively light data calendar set for the coming week. Instead, the focus is likely to be on ECB speakers, domestic politics, and trade risks, with the latter underpinning to euro’s slide so far today. Specifically, the downside worries from trade disruption are a major concern for the bloc. While we think that the eurozone should be relatively insulated from first-round effects, there seems little prospect that Trump will offer the bloc a tariff carve out based on recent rhetoric, while second-round effects are also likely to be a significant concern. Whether or not this has an impact on monetary policy will be something to keep an eye on later this week, with Lane, de Guindos, and Schnabel headlining a busy roster of ECB members who are due to speak.
GBP
After sliding through Friday trading, GBPUSD is broadly tracking sideways so far this morning, though we continue to think that GBPEUR is the better reflection of UK fundamentals, with the cross making gains to end last week. As we have previously noted, while the details of October’s budget were disappointing, the broad outline was expansionary, and that should be sterling positive at the margin when all is said and done. Moreover, we news over the weekend that Trump might exempt the UK from his proposed tariffs should also favour sterling upside on a relative basis. With this in mind, we continue to look for the pound to make gains on crosses ahead of tomorrow’s labour market data release, even as GBPUSD price action is dominated by events on the other side of the Atlantic.
CAD
The loonie continues to trade relatively rangebound against the dollar, in contrast to other G10 FX pairs. That said, it is a little surprising to us that trade risks do not weigh more heavily on the Canadian currency. Trump tariffs, if implemented, would be deeply disruptive to North American trade. Three-quarters of Canadian exports end up in the US, and given the realities of Canadian geography, we think the ability of Canadian firms to diversify their export destination mix is limited. That means that the impact of any tariffs would have to be absorbed by a combination of Canadian exporters, US importers, or US consumers, either via lower quantities demanded or by a change in prices. Moreover, we are inclined to think that much of this impact would fall on Canadian firms, given the aforementioned factors. With this in mind, we see upside risks for USDCAD over the coming months, though if Canada were to find itself exempted from tariffs too, then US trade policy would likely become a loonie positive.
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