Global Themes

Broad weakness kept the U.S. dollar pinned near three-month lows. Sterling led major currencies higher against the greenback with the U.K. unit climbing to November peaks on reports that Brexit Day might get extended beyond March 29. The euro held aloft near October peaks while stronger oil around $53 supported Canada’s commodity-influenced currency. America’s buck is off to a sluggish start to the year thanks to the Fed signaling a steady rate bias. The Fed’s top official, Chairman Jerome Powell, said this week that lower inflation would give the central bank latitude to be patient with policy. Inflation will be top of mind today with the U.S. issuing a report on consumer prices which are forecast to moderate. Lower inflation would reduce the need for higher U.S. borrowing rates, a scenario that could keep the buck tilted toward its back foot.

CAD

Canada’s dollar stuck near five-week peaks, boosted by better performing stocks and commodities. Trade tensions between the U.S. and China have defused and the Fed seems increasingly unlikely to raise borrowing rates any time soon. Those factors have been a boon for currencies with close ties to the world economy. It also helped the loonie that the Bank of Canada this week put markets on notice for an eventual rate increase with area unemployment running at a 40-year low. 

EUR

The euro rose toward October highs against the U.S. dollar as it continued to benefit from the latter’s sluggish start to the year. The single currency’s more than 1% rally over the week has it flirting with its best weekly performance in months. It remains to be seen whether the euro can muster a meaningful rally since the bloc’s economic prospects have shown few signs of brightening after a slowdown in 2018. The coming week will be rich on European data with reports due Tuesday on German growth and Thursday on central bank-influencing inflation. Less than bullish data would suggest limited scope for euro appreciation as it would depict a high bar for the ECB to raise borrowing costs.

GBP

Sterling soared to November highs overnight on reports that Britain is mulling whether to delay Brexit Day beyond late March. Theresa May later dismissed the story which cause the pound to pare its gain. A potential day of reckoning looms next week when U.K. lawmakers are expected to vote on the prime minister’s Brexit deal on Jan. 15. Lawmakers are all but certain to snub the deal. The muddier the outlook for Brexit, the greater the risk that it could trigger a second referendum or early elections. Should Britain ultimately decide to cancel Brexit such a scenario would risk catapulting the pound significantly higher.

USD

The dollar stayed in the red after a gauge of U.S inflation moderated in line with forecasts, evidence of muted prices that suggest the Fed would leave rates steady over the foreseeable future. Headline inflation slowed inside of a 2% annual rate. Core inflation, a gauge of underlying inflation, steadied at 2.2%. A sharp slide in gas prices weighed on inflation, a trend that may not be sustainable given the bounce in oil prices to above $50. Good news next week on the U.S. consumer might help the dollar stabilize as it would be consistent with the economy maintaining strong momentum. Retail sales, due Jan 16, are forecast to rise. 

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