Foreign exchange markets are seemingly weighed down by a heavy blanket of snow this morning, with trading ranges remaining remarkably tight ahead of next week’s central bank meetings. The greenback is up microscopically, and the Australian dollar is the only major with material gains, having risen sharply after the latest inflation numbers surprised to the upside. Equity futures are tumbling ahead of the North American open, with weak earnings guidance from Microsoft helping to keep overall risk sentiment restrained.

The euro remains well-supported after the latest purchasing manager survey data suggested that economic fortunes are set to diverge on either side of the Atlantic. Indices published by S&P Global yesterday showed the composite measure for the United States remaining firmly in contractionary territory in January, while the euro-area equivalent pointed to an expansion. This hardly suggests the European economy will outperform the US in nominal terms—these sentiment surveys measure the rate of change relative to prior months, not absolute growth levels—but the directional move suggests growth differentials will continue to narrow against the dollar.

Australian prices climbed 7.8 percent year-over-year in the last quarter of 2022,marking the fastest pace in 32 years and topping market expectations that had been set closer to the 7.6 percent mark. The trimmed-mean measure preferred by the Reserve Bank of Australia jumped to 6.9 percent, also exceeding market forecasts. Yields and the currency gained sharply in the moments after the release as traders firmed bets on a quarter-point hike at the central bank’s February meeting and raised the odds on a final, similarly-sized move in March.

The Bank of Canada is widely expected to deliver a quarter-point hike at this morning’s meeting, but market participants will focus on the messaging that accompanies the decision – messaging that could foreshadow changes at other major central banks in the weeks and months to come. Governor Tiff Macklem won’t want to commit the Bank to a pause in rate hikes, and most certainly won’t declare victory over inflation—most modern central bankers believe that tough talk can help keep consumer expectations restrained—but he is likely to acknowledge evidence of a cooling in price pressures and growing downside risk as the lagging effects of last year’s rate increases filter through the economy. Language in the statement and accompanying monetary policy report could outline reasons for moving to a “data dependent” footing in the months ahead, with slowing growth and household vulnerabilities mooted as reasons for caution.

Currency market reaction around the decision could prove nuanced – the Bank’s tone could shift pricing along the Canadian rates curve, but will also help traders anticipate communication changes at other central banks. Yield curves and exchange rates could move in sympathy with Canada’s, nullifying or exaggerating the impact on the loonie. More generally, we think the currency could find support in coming weeks as language from Federal Reserve policymakers also takes a cautious turn.

The Bureau of Economic Analysis will release its fourth-quarter US gross domestic product report tomorrow morning, and the latest personal income and expenditures data on Friday, helping to set the stage for a Federal Reserve decision next week. Broadly speaking, both sets of data are expected to illustrate an American economy that is showing signs of strain, but one that continues to receive a powerful boost from household income gains – a fundamental backdrop that should make central bankers more cautious as they attempt to steer growth toward a soft landing.

The Washington Post is reporting that Lael Brainard, current vice-chair on the Fed’s rate-setting committee, is under consideration to chair the White House’s National Economics Council. We doubt Brainard’s departure would mark a significant shift in the overall policy stance, but she has long been one of the central bank’s more dovish voices, and is believed to have played a critical role in adding nuance to communications in recent months, minimizing turbulence as the pace of rate hikes began to slow