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Stable - not even improved - US economic data this week would go a long way to helping cement the US Dollar's status as having the only major central bank in the G10 space that is currently looking to tighten its monetary policy in 2016 (although once this 'Brexit' mania passes, the BOE will hike rates at the end of this year too - more on that later today). There is less than a 50% chance of the Fed raising rates by 25-bps in December per the Fed funds futures contract, a clear indication that markets are focused too short-term: economic data momentum has been weak in 2016, so participants are extrapolating the near-term into the view that the Fed won' raise rates this year at all.
This view is simply divorced from reality: Q1'16 GDP is tracking at +2.6% according to the Federal Reserve Bank of Atlanta. Hence, the importance of the stabilization in data: if economic data momentum neutralizes, focus can return to the 'big picture' which should provoke market participants from pricing in at least one rate hike in 2016 (though as it stands, I think the Fed will hike in June then again in December - central banks don't have the courage to change policy without new economic projections in hand so the Fed is bound to those meetings that produce new SEPs). A repricing event that sees the market drag forward its expectations should prove to be a bullish catalyst for the US Dollar in the short-term.
Even as the USDOLLAR Index is steadying today - markets need some signs that their anxiety over recent disappointing data (another example of how satisfaction in life is all about expectations relative to reality) is overblown - EUR/USD and GBP/USD are grinding lower as growth concerns and the prospect of a weaker European Union are priced in.
Our interest is thus still drawn to several of the EUR- and GBP-crosses, in particular EUR/CAD and GBP/CAD. EUR/CAD has just started to push lower out of a symmetrical triangle (targeting a move into channel support near C$1.4400-1.4600) while GBP/CAD could be on the cusp of a major double top now that the uptrend from the July 2013, November 2014, and April 2015 lows has broken.
--- Written by Christopher Vecchio, Currency Strategist
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