CAD: Canadian inflation cools to 2.3%
The Consumer Price Index rose 2.3% year over year in January which marks a deceleration from the 2.4% gain observed in December. This cooling in headline inflation was primarily driven by gasoline prices which posted a significant decline of 16.7% due to base year effects. While the headline number softened, underlying pressures persist as the CPI excluding gasoline rose 3.0% and matches the increase from the prior month. Upward pressure came from items previously affected by the temporary GST/HST break in early 2025 such as restaurant meals and alcoholic beverages which are now showing stronger price growth in annual comparisons.
The Bank of Canada likely views this report as evidence of gradual progress even as core inflation measures remain sticky. The central bank will note that shelter costs are finally slowing with year over year growth falling to 1.7% which is the first time it has dropped below 2.0% in nearly five years. However, the Bank will also pay close attention to preferred core measures like the CPI median and CPI trim which came in at 2.5% and 2.6% respectively. These figures suggest that while the broader trend is improving the path back to a sustainable 2% target remains bumpy and prevents the Governing Council from declaring an immediate victory on price stability.
Market sentiment has shifted noticeably in response to the broader economic landscape and the Canadian dollar has weakened to 1.366 against a stronger US dollar. This move reflects a risk off tone in global markets as equities falter with the technology sector lagging and investors beginning to question the massive capital commitments toward AI infrastructure. Simultaneously there has been a flight to safety in fixed income markets causing the 10 year US Treasury yield to drop sharply from a recent high of 4.30% to 4.03% this morning. These crosscurrents suggest that while domestic inflation is easing the external environment is becoming increasingly complex for Canadian policymakers and investors alike.
GBP: Sterling slides after dovish jobs report
Sterling is extending losses this morning after UK wage growth undershot expectations and the unemployment rate climbed to a near five‑year high. GBP/USD has slipped below its 21‑day moving average, putting the 50‑day near $1.3525 in view, while GBP/EUR is once again testing the key €1.1460 support zone we’ve highlighted for weeks.
December’s weekly earnings rose 4.2% versus the 4.6% expected, while regular private‑sector pay — the BoE’s preferred gauge — slowed to 3.4%, its weakest pace in more than five years. With the Bank explicitly targeting a move toward 3.25% as consistent with 2% inflation, today’s print will be seen as progress.
The labour market is also loosening more visibly. Unemployment rose to 5.2% in the three months to December, the highest since early 2021, and payrolls fell by another 11,000 in January — taking the annual decline to 134,000. For policymakers already concerned about weak demand, this combination strengthens the case for further rate cuts.
Odds of a March BoE cut have climbed to roughly 80%, up from around 70% just a day ago. With expectations already leaning dovish, Wednesday’s inflation report doesn’t need to deliver much — simply showing that disinflation remains on track would be enough to lock in those views. Markets now fully price another cut before year‑end.
Against this backdrop, the bias for sterling remains to the downside — particularly as the currency has already shed much of its political risk premium ahead of next week’s by‑election, a vote likely to intensify pressure on Prime Minister Keir Starmer.
EUR: Risk reversals blink, trend holds
Amid growing interest in the euro’s internationalisation, euro‑area finance ministers met in Brussels yesterday to discuss ways to expand the single currency’s global role by promoting its use in both issuance and transactions, with the aim of diversifying away from US dollar. The meeting followed the ECB announcement over the weekend that it is prepared to offer euro liquidity to central banks around the world via EUR repo lines.
Such developments may not be persuading the euro to move higher against the dollar per se, but they would certainly lubricate bullishness in the event of further US‑led dollar weakness. In the short term, still sitting comfortably above fair value, the pair appears poised to drift lower in the absence of any imminent clear catalyst, although we have argued that with not‑so‑convincing US macro data, EUR/USD sellers have little to cling to when making the case for a sustained move lower. While a break below the 21‑day moving average at 1.1839 would be understandable this week, the bullish upside configuration should remain intact, with the February lows at 1.1766 acting as solid support for now. The options market captures the pair’s posture against these technical levels quite well: downside risk in the week ahead, with 1‑week risk reversals turning bearish for the first time since January, while further out, positioning appears more confidently bullish, persuading us away from calling the end of the euro’s ascent against the dollar since mid‑January.
For today, Germany’s and the eurozone’s ZEW surveys are due. The expectations sub‑index has accelerated from the April 2025 lows and now sits near the highs from 2021. It will be instructive to continue monitoring the series as 2026 brings less trade uncertainty and the much‑hoped‑for German fiscal stimulus.
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Calendar: February 16 – 20
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
