Risk-sensitive currencies are moving higher and the dollar is under pressure as traders position for a more stable – and less divergent – Federal Reserve in 2023. With growth gaps narrowing and the US tightening cycle reaching its logical conclusion as other central banks catch up, bets against American exceptionalism are growing in scale in the run-up to year end.

Beijing’s crackdown on protesters continued overnight, with security officials pledging to take action against “hostile forces” threatening the state – but health authorities said they would ramp up vaccination of older citizens, addressing a significant hurdle to reopening the economy. According to a statement from the National Health Commission, medical personnel will begin going door-to-door to homes and nursing facilities in an effort to vaccinate an elderly population that has proven reluctant to participate thus far. This, along with a more moderate tone in other communications, has helped trigger a rally in onshore equity markets and across the global commodity complex.

Euro area inflation fell unexpectedly in November, with lower energy prices breaking a 17-month series of rising prints. Data released by Eurostat this morning showed consumer prices were 10 percent higher in November relative to a year earlier, down from the 10.6 percent annual increase recorded in October. The euro slipped slightly as investors pivoted toward expecting a 50-basis point hike at the European Central Bank’s December meeting, downshifting after two consecutive 75-basis point moves.

Oil prices are setting up for a third day of gains on a reported 7.85 million-barrel weekly drop in US inventories. West Texas Intermediate is changing hands for $80 a barrel, and Brent is holding around $85. The OPEC+ group of oil exporting countries yesterday decided to switch this weekend’s gathering to a virtual one, suggesting that a production cut is less likely.

The Canadian dollar remains on the defensive after yesterday’s gross domestic product release disappointed markets – despite beating expectations at the headline level. Exports, government spending, and inventory accumulation helped the economy expand 2.9 percent in the third quarter, growing almost twice as fast as predicted, but household consumption dropped 1 percent, business investment fell 5.1 percent, and residential investment dropped even more dramatically. The national statistics agency expects growth to flatline in October.

This morning, a second estimate for third quarter US gross domestic product is expected to show the economy expanding at a 2.7 percent annualized pace, a slight revision from the previously-reported 2.6 percent gain.

The number of available positions in the US is seen falling slightly to 10.5 million in October from 10.7 million one month earlier, but the latest Job Openings and Labor Turnover Survey is unlikely to bring hard evidence of a weakening labour market – most indicators of consumer spending and business activity remain remarkably strong.

Markets will be watching warily when Jerome Powell speaks at 1:30 this afternoon. In a short speech at the Brookings Institution, the Chair is expected to set the stage for a slowing in the pace of rate hikes, while also highlighting strong labour markets and robust activity levels as reasons to think rates will need to climb further into restrictive territory before a pause can be considered. This message could lift yields and the dollar, but we don’t think a repeat of this summer’s Jackson Hole performance is in the offing – although financial conditions have loosened, market pricing appears largely consistent with the Fed’s objectives.

Karl Schamotta, Chief Market Strategist