Instead of showing any real signs of slowing, yesterday's US inflation data delivered a worrying 0.6% month-on-month rise in core prices and does nothing to suggest that the Fed will be any more relaxed in the pace of its tightening cycle. This should be a core story that supports the dollar over the coming months - i.e., that the Fed has more cause than most to get its policy rate to neutral. Policy hawks think that the neutral rate may be nearer 3.50% than the 3.10% priced in by money markets today. DXY is edging to a new high - led by the fall in European currencies (sterling has a 12% weight in DXY). Expect further grinding gains today. On the calendar today we have US PPI, which is expected to edge lower from its 11% year-on-year peak. We doubt this will soften the dollar at all.
Quite a move in USD/CAD yesterday. USD/CAD made a new high, then new a low, before Equities got demolished and we walk in this morning with USD/CAD back near the recent highs. CAD’s correlation with risk appetite remains elevated so the short term direction remains highly dependent on stock market moves, especially amid an absence of domestic data releases. We continue to feel that CAD losses should remain relatively limited, given a hawkish BoC, resilient growth, and generally elevated commodity prices but fundamentals do not matter much for spot movement at the moment. Near-term, look for more chop around 1.30.
EUR/USD continues to languish near the lows. European Central Bank President Christine Lagarde has all but confirmed that the ECB is ready to start hiking rates in July, pointing to a three-hike scenario and the deposit rate ending the year at 0.25%. However, that scenario has been well priced for some time and is providing little support to the euro. Instead, the pro-growth euro is being battered by growth headwinds from the war in Ukraine and China's self-inflicted slowdown. On a day when G20FX are on the back foot, EUR/USD looks as though it can grind lower on its multi-day way towards the next big support at 1.0350.
The pound's performance has been quite closely correlated with global growth prospects (China). This has not been helped by the return of legacy Brexit issues, where the UK government seems intent on adjusting the Northern Ireland protocol in what some would call Boris Johnson wanting to 'have his cake and eat it'. The EU is not budging here and reports suggest that the UK government is giving the EU until early next week to soften Northern Ireland's trading arrangements, otherwise the UK will introduce legislation to do so. A UK-EU trade war will be the headline and will not be welcome for the growth-sensitive GBP/USD remains very heavy and can continue edging towards 1.20.
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