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The Week Ahead: Weak USD, Strong EUR, and BoC-Driven CAD in Focus

The latter half of the past week saw a resumption of pronounced bearish sentiment hit the US dollar once again, as concerns over persistently weak US inflation (reinforced by lagging producer price data), strength in the euro, and rumors of China rethinking its US debt purchases helped lead to a sharp, extended sell-off for the greenback. While the very beginning of the year showed early signs that the dollar might stage a comeback after an abysmal 2017, this past week dashed those hopes as the US dollar resumed its plunge from December. As of Friday, dollar weakness has prompted the USD index to approach September’s multi-year low around 91.00, and EUR/USD to break out to a new three-year high above 1.2100. Even after China subsequently dismissed the reports that it was considering halting US treasury purchases, and Friday’s core CPI inflation reading from the US came out higher-than-expected, the dollar remained unable to rebound significantly, as it resumed its plunge towards new lows.

For its part, the euro extended its persisting strength this week, especially after Thursday's release of the ECB monetary policy meeting accounts, or the minutes from the European Central Bank’s last meeting in December. The minutes were seen as hawkish, as ECB officials hinted that tighter monetary policy, which includes the possibility of higher interest rates as well as the winding down of asset purchases, could be on the horizon amid strong European economic growth. Coupled with pronounced US dollar weakness, euro strength was instrumental in pushing EUR/USD up to new multi-year highs this past week.

In other markets, stocks continued to rally to new highs during the week, particularly in the US and UK, as earnings season has just begun and investors were anticipating another strong showing from the initial slate of bank earnings reports. The price of gold extended its recent sharp rally in the latter half of the past week, hitting a high on Friday above $1330, a level not seen since September, as the US dollar’s exceptional weakness boosted the precious metal. In contrast, cryptocurrencies, including the popular Bitcoin (BTC/USD), fell sharply this past week, pressured by initial reports that South Korean officials were considering a possible ban on Bitcoin trading. Though it was subsequently reported that the South Korean government is in fact divided on issuing a ban, damage had been done and BTC/USD fell back down towards year-to-date lows, well off its December record highs.

The week ahead promises more volatility for major markets, particularly currencies, as the featured highlight will be the Bank of Canada’s monetary policy and interest rate decision on Wednesday. This time around, current consensus expectations point to another potential interest rate hike by the BoC – to 1.25% – after the central bank last raised rates back-to-back in July and September. Other key events in the week ahead will include UK CPI inflation data on Tuesday. And as noted, Wednesday brings the BoC policy decision, but will also feature euro area CPI. On Thursday, Australia employment data will be released, followed by China GDP and Industrial Production, and then US Building Permits and Housing Starts. Finally, Friday will feature UK Retail Sales.

The currency focus for the week ahead, therefore, will remain on both the beleaguered US dollar and exceptionally buoyant euro, as well as the Canadian dollar due to the potentially pivotal rate decision from the Bank of Canada.

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