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USD / CAD - Canadian dollar tied to US CPI

- US Inflation data will determine near term USDCAD direction.

- Analysts expect frequent and steep rate cuts in 2024.

- US dollar opens largely unchanged compared to close.

USDCAD: open 1.3372-76, overnight range 1.3355-1.3383, close 1.3382, WTI $72.54, Gold, $2032.04

The Canadian dollar drifted aimlessly in another uneventful overnight session. Traders are eagerly awaiting today's US inflation report and hoping that it reinforces the downward outlook for US rates.

The consensus for the key Core-CPI reading for December is a decline of 0.2% to 3.8% y/y, compared to 4.0% in November. If so, it would boost the odds of a Fed rate cut in March from 65% to around 90%. It won’t rise to 100% because there are two more CPI data releases before the March 20 meeting. A substantially larger than expected fall in core-CPI could put a January 31 rate cut on the table.

A lower than expected core CPI would boost the Canadian dollar due to broad US dollar selling pressures, while a stronger than expected result would have the opposite effect.

However, NY Fed President John Williams tried to downplay talk of near-term rate cuts. He said that there is still a lot of work to be done before inflation gets to 2.0%, which means the Fed will need to keep rates in restrictive territory for some time.

Middle East tensions continue to rise. An oil tanker in the Red Sea off of Oman was boarded by the Iranian military, and UK and US officials are still deciding what to do with Houthi rebels firing missiles at Red Sea shipping.

The Middle East news barely made a dent in oil trading. West Texas Intermediate bounced in a $71.18-$72.87 range, which has contained price action all week. Yesterday’s news that US crude inventories rose by 1.1 million barrels in the week ending January 5, and a report that Barclays Bank cut its Brent oil price forecast limited gains.

EURUSD drifted higher in a 1.0958-1.0989 range. Noted ECB hawk Isabel Schnabel said it was too early to discuss rate cuts, which is notable only because it underscores the divisions on the ECB Executive Council. Even so, EURUSD was quietly bid.

GBPUSD traded in a 1.2730-1.2774 range. ING economists are suggesting that the odds for a UK recession in 2024 are falling as lower rates will give the government room to cut taxes and ease mortgage stress. UK GDP data is due Friday.

USDJPY consolidated recent gains in a 145.28-145.81 range. Prices are underpinned by Tuesday’s weak wage data, which implied “lower-rates-for-longer.” A former BoJ Board member, Makoto Sakurai’s prediction that the BoJ would hike rates in April or May, was ignored.

AUDUSD traded in a 0.6695-0.6726 range, supported by a larger than expected trade surplus in December (actual 11.437 billion vs. 7.66 B in November)