• USD Outlook: The dollar is gaining strength, supported by strong US small business optimism and anticipation of the November CPI release. A higher-than-expected core CPI could challenge the market’s 88% odds of a 25bp Fed rate cut next week, increasing uncertainty.
• BoC Impact on USD: A 50bp BoC rate cut could widen the Fed-BoC rate gap to 150bp, weakening the Canadian dollar and slightly softening the USD. A surprise 25bp cut might bolster the USD, signaling doubts about next week’s Fed decision.
• EUR Weakness: The euro remains subdued ahead of tomorrow’s ECB decision. A 25bp rate cut with dovish guidance could pressure the euro further, especially as US CPI and BoC decisions weigh on EUR/USD, which could resume its bearish trend.
• GBP Strength: Sterling nears key support at 0.82 against the euro, benefiting from stronger UK growth prospects and closer BoE-Fed policy alignment. Improving EU-UK relations and high deposit rates make GBP attractive, but February’s BoE stance could temper its momentum.
• Key Levels to Watch: USD strength hinges on CPI data and BoC decisions, EUR/USD may test 1.0450 if bearish trends continue, and EUR/GBP’s break below 0.82 could trigger pre-Brexit sterling levels buzz.

USD: Dollar Gaining Momentum

The dollar has found support, partly driven by the unexpectedly strong US NFIB Small Business Optimism Index. Unsurprisingly, US entrepreneurs are optimistic about upcoming tax cuts and deregulation. Key attention today is on the 1430 CET release of November US CPI. While the Fed seems to have shifted focus from inflation, any upside surprise to the expected 0.3% month-on-month core inflation could strengthen the dollar further. Markets currently predict an 88% likelihood of a 25bp Fed rate cut next week, but stronger CPI data might make this a 50:50 decision.

Meanwhile, today’s Bank of Canada (BoC) decision could influence US markets. A 50bp cut, as expected by most economists, would widen the Fed-BoC policy rate gap to 150bp. If this happens, the Canadian dollar may weaken, while the US dollar might soften slightly as expectations of a Fed cut solidify. On the other hand, a surprise 25bp cut by the BoC could signal doubts about a Fed cut, potentially boosting the dollar amid renewed uncertainty.

EUR: Quiet Before ECB Decision

The euro remains under pressure ahead of tomorrow’s ECB decision, where a 25bp rate cut is anticipated. A dovish tone from ECB President Lagarde may further weigh on the euro. With US-EU rate differentials still heavily favoring the dollar, only a hawkish shift in Fed expectations could widen this gap further.

For EUR/USD, today’s US CPI and BoC decision will be key drivers. Technical signals suggest the pair is ready to resume its bearish trend if supported by macro or geopolitical developments. The 1.0550/70 range could serve as resistance, with potential to drop toward the 1.0450 level. Despite its usual seasonal strength, the euro is struggling this month, likely reflecting corporate America’s eagerness to sell into any rally.

GBP: Sterling Steals the Spotlight

EUR/GBP is nearing critical support at 0.82. If not for dollar strength, the Bank of England’s trade-weighted sterling index would be hitting new yearly highs. Two factors are driving sterling’s rise: a functional UK government with mild fiscal stimulus and stronger UK growth prospects compared to the eurozone. This has aligned the BoE’s policy trajectory closer to the Fed than the ECB, keeping sterling’s hedging costs high.

A break below 0.8200 in EUR/GBP could spark talk of sterling returning to pre-Brexit levels, potentially aided by improving EU-UK relations under the new UK Labour government. While sterling appears well-positioned, a more dovish BoE stance in February—if services inflation drops significantly—could limit further gains. For now, all eyes remain on the 0.8200 level.