It has been a trendless week for the dollar so far, with very little follow-through from Friday’s jobs-inspired rally. Today sees the biggest data event risk of the week – and probably of the month. US July CPI is expected to soften a little on a headline basis but nudge up on a core basis to just above 6% year-on-year. Stubbornly high core inflation should support the Federal Reserve’s position that its work is far from done. It should also support pricing in the US money market curve that sees the policy rate taken around 125bp higher in this cycle. Barring a massive upside surprise we expect the inflation data to cement current tightening expectations and keep the dollar bid near the high.
The USD/CAD traded between around 1.2845 and 1.2900 yesterday and has essentially moved sideways overnight. Another relatively quiet session is in store for the CAD today with external factors—US CPI— “driving the bus” for today. We’re not expecting much in terms of movement of volatility in the CAD today with an expected rangebound trade between 1.2850 – 1.2950
EUR/USD continues to languish near the lows and there does not seem a compelling case to buy it. Medium valuation considerations do not show it as particularly undervalued while the larger geopolitical event risks leave Europe more exposed than North America. There is no European data of note today and EUR/USD will therefore be bounced around by the US CPI print. Declining levels of implied volatility suggest investors may be in no mood to chase EUR/USD out of a 1.0100-1.0300 range near term.
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