ing_logoWe expect USD to rebound today following President-elect Trump’s “too strong” dollar comments yesterday (which led to lower USD and UST yields). The catalyst for this should be the rise in US CPI above 2%YoY for the first time since mid-2014, due to energy related factors. The likely resulting increase in UST yields should benefit USD the most against low yielders such as JPY and EUR. Also expect a decline in GBP/USD, which should be a function of lower EUR/USD and a GBP correction after its overreaction yesterday.


We don’t see the recent EUR/USD strength as unjustified as declining UST yields and a stable risk environment pushed EUR/USD short-term fair value higher. However, with the likely increase in UST yields today (see above), look for a justified EUR/USD fall towards the 1.0600 level.

Although the intention to exit the single market was confirmed by PM May yesterday, the generally conciliatory and from time-to-time upbeat tone of the statement and the lack of negative surprises (as the broad outline of the speech was known beforehand) led to a sharp GBP rally. Investors clearly preferred to focus on the what they perceived as more clarity on the Brexit strategy.


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Despite this, we don’t see the speech as materially changing GBP prospects. We still see it as difficult for the UK government to agree on the new trading environment with the EU within the two years, while the jury still remains out whether all participants in negotiations will be “economically rational” or whether they will be politically driven. We continue to look for a very bumpy road for GBP ahead and expect more upside to EUR/GBP. The GBP may resume the weakening bias as soon as today if we see another decline in UK employment (this would further support the view that UK businesses are sitting on their hands due to the Brexit uncertainty and don’t hire new workers despite the solid growth). We look for EUR/GBP to move towards the 0.8700 level today.

The BoC policy meeting is the highlight of the domestic calendar. While the latest jobs and leading activity data have eased the pressure for additional stimulus, we remain wary of a dovish Poloz surprise (despite our and consensus call for no rate cut). With the CAD OIS curve already upward sloping, risks are asymmetrically skewed to a dovish front-end repricing (which would modestly weigh on the currency). USD/CAD to move towards the 1.3150 level today.

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