For today the US highlight will be the University of Michigan September survey - providing insights on consumer sentiment and inflation expectations. Sentiment had plunged in August, yet this dip did not seem to hit August retail sales. We think more interest today will be in the 5-10 year inflation expectations, which now stand at 2.9%. Any rise back to 3% or above could nudge US rates higher on the view that the Fed may not be as relaxed on inflation as they appear. DXY to trade out a 92.50-93.00 range.
Investors are growing more worried that Canada's federal election on Monday could result in a deadlock that hampers Ottawa's response to the COVID-19 pandemic and further slows the economic recovery from the crisis. Polls show Prime Minister Justin Trudeau's Liberals virtually tied with the Conservatives ahead of the Sept. 20 vote, raising the prospect that no party will be able to form even a stable minority government. Financial markets generally view Canadian elections from the vantage point of which of the big parties would be most friendly for investors, but that tendency may take a backseat this time to the desire to have a government quickly in place in a crisis. An outcome "that leads to a gridlocked government is going to complicate the recovery going forward leading to some hesitancy by investors and possibly a weaker loonie.
Overnight we have seen the FT report an unpublished, internal study at the ECB suggesting that inflation could sustainably hit 2% by 2025, such that the ECB could start raising rates in 2023. The ECB has said the article is inaccurate. The move smacks of some of the ECB hawks trying to open up the debate on monetary normalization. The EUR has not reacted to the story, but the story does serve as a reminder that dissension could be growing and that overcoming months Eurozone FX and rates markets could become more sensitive to any stronger growth or higher inflation data. The EUR/USD is likely to trade in the 1.1750 – 1.1800 range today.
A poor UK August retail sales report may take some of the momentum out of the rise in the UK money market rates and also GBP. Yet the BoE meets next Thursday and it seems unlikely that they, unlike the RBA earlier this week, would want to deliver a 'rate protest' against market pricing of the policy cycle. The GBP/USD continues to gravitate around 1.3800.
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