After a positioning-driven rally in risk assets over the past couple of months, financial markets are returning to macroeconomic factors, where the 2023 global slowdown is in focus. Brent crude falls below $80 a barrel despite the OPEC+ supply cuts, bonds rise in price, and equities begin to lose some of their impressive rally from October lows. It is important to note that the US yield curve goes deeper into inversion (short-term rates are significantly higher than long-term ones). The 2-10 year Treasury curve is now inverted by 82bp. 

The behavior of the main market indicators resembles the anxiety of investors before the recession, but the Fed does not seem to be giving in. This environment remains favorable for the dollar and negative for commodity and pro-cyclical currencies. DXY has found support below 105 and could as well rise to 107 ahead of next week's FOMC meeting when the Fed is likely to signal little comfort with inflation with its Dot Plot.

The main threat to the dollar's bullish outlook comes from the risk of any softer US price data for November (PPI released tomorrow, CPI next Tuesday) or a more positive reassessment of China's growth outlook amid Covid easing. However, poor China trade data released the day before serves as a reminder that the export environment will remain exceptionally challenging for China in 2023.

It seems that EUR/USD trading has become more stable over the last week, however, EUR/USD realized weekly and monthly volatility is still above 13%. Last week's 1.0595 was a corrective high in EUR/USD - we should know much more by next Wednesday night after the FOMC meeting - and it will be interesting to see what the European Central Bank has to say about interest rates. Some speculate that the current lull in European bond markets may prompt the ECB to act a little more aggressively in its QT plans. Today, a couple of ECB speakers, Philip Lane and Fabio Panetta, are speaking, but it is unlikely that any of them will rebuke the market consensus on a 50 bp increase next week. For now, EUR/USD could drop to 1.0400 in calm markets.

Trading conditions for the pound sterling have stabilized, with monthly trading volatility fairly stable around 12-13% and trading above 20% at the end of September. It looks like the stock market has grown enough for the moment that German bond spreads are now starting to widen again. In other words, the fiscal rally has exhausted itself, and the pound will no longer find strength here. If we turn to a more macroeconomic trading environment, then sterling should be lagging. The Fed, which remains hawkish, will return stock markets under pressure next week. This is generally a negative environment for the pound, where a large UK current account deficit is a downside factor. The GBP/USD pair has retreated from the strong resistance level at 1.23 and may return to the 1.19 area next week.

The Bank of Canada (BoC) is making a monetary policy decision today. As discussed earlier, the consensus is split between a 25 and 50 basis point increase, but a half point increase looks more appropriate given strong economic activity and a very strong labor market. Nevertheless, the situation is almost enough for 50 bp, given that the expected economic downturn and the instability of the Canadian housing market speak in favor of a smaller rate hike. Markets are pricing this meeting at 35 basis points and are therefore slightly skating in favor of a quarter point gain: in the base case, the Canadian dollar should rise by 50 basis points on a hawkish surprise. However, the impact of BoC on CAD is likely to be short-lived as external factors remain more important. A sustained recovery of the Canadian dollar from these levels undoubtedly requires a recovery or at least stabilization in oil prices. Today USD/CAD may return below 1.3600, but short-term upside risks remain high.