Yesterday’s US GDP once again exceeded expectations, rising 3.3% last quarter, and taking 2023 growth up to 3.1%. Strong domestic demand continued to provide most of the gain, with consumer spending up 2.8% and real domestic final sales up 2.7%. The dollar is trading lower against most of G10 currencies this morning after today’s PCE data, which came out as expected at 0.2% MoM.

The S&P 500 closed at a record high for a 5th consecutive session yesterday. Several factors drove the rally, including the upside surprise in US GDP for Q4, which added to hopes that the economy could indeed end up with a soft landing. Brent Crude saw a slight reversal overnight and is trading lower after reaching its highest level since November.

EUR The ECB opted to keep its policy rate on hold as expected, however the market is noting that there was more of a dovish shift than anticipated. Talk of rate cuts was seen as “premature”, however language on growth and inflation softened. The meeting reaffirmed consensus view of a 25bps cut in April and potentially 150bps in 2024 . Markets interpretation of Lagarde yesterday is that a combination of infighting and worry over acting too soon could mean the first cut “late”, but that 50bp increments are more likely as a result.

GBP Market is focusing on the MPC meeting on February first. Traders expect the Bank Rate to remain unchanged for a fourth consecutive meeting at 5.25%. GBP/USD is drifting sideways, mostly ignoring the data showing a better UK consumer sentiment number. Vs the EUR, the GBP is near a five-month high reached yesterday on the view that EURO zone interest rates will fall more than in the UK in H1. 

CAD The Canadian dollar is climbing today as rising bond yields and firmer metals prices following a report of additional China stimulus. US two-year yields exceed CAD by 288 bpts, and 10-year yield spread is 61.7bpts in favor of US. The UK paused talks to strike a free-trade deal with Canada, with both sides accusing the other of obstructing progress.

JPY Overnight was the latest Tokyo CPI reading where headline CPI was down to +1.6% in January (vs. +2.0% expected). This is the first time that’s been beneath 2% since March 2022. That seems to have led investors to question how much the Bank of Japan will be able to hike rates this year.

MXN The peso extended gains after yesterday’s strong US GDP number and the prospects of a soft-landing in the US. Market positioning itself for the risk that the Peso will weaken in the event of a Trump victory. According to a survey from SSB&T, 36% of investors exposure to Mexican debt is currently hedged against a weaker Peso.

Concerns center around a second Trump administration that would lead to more friction, increasing tensions at the border and immigration costs. If we recall the November 2016 election when the Trump victory sent the Peso down 9%, hedgers are clearly not taking as many chances.