Most dollar crosses have stabilized after the large post-CPI moves on Tuesday. In the meantime, markets have progressed in pricing in more Fed tightening, and Fed funds futures are currently embedding a 3.4% peak rate in March 2023, which is likely offering a good floor to the dollar. Since the Fed has remained quite hawkish in recent commentaries and may not have any interest in pushing back excessively hawkish pricing at its September, it may mostly be up to the data to force any dovish re-pricing at this stage. There are a number of data releases to keep an eye on today: retail sales, industrial production, Empire Manufacturing, and the Philadelphia Fed Business Outlook. Jobless claims may also gather more attention than usual after a surprisingly big drop last week fuelled the hawkish narrative of a still very tight labour market in the US.
Yesterday, the US dollar momentarily broke CAD 1.32. It was the fourth time in the past two months, but it has not closed above this level once. This morning, the pair is quietly holding in a constrained range roughly between 1.3155 and 1.3185. The low from yesterday, which was near 1.3140, appears to be a solid support level. The USD soared in response to the hotter than anticipated US CPI reading, which caused the CAD sell-off by more than 1% intraday, the largest one-day decline in the CAD since early July. Weakness in the CAD has been primarily driven by 1) the general USD tone and 2) risk aversion. Over the medium term, these two factors will continue to dominate CAD trading.
There are no market-moving data releases in the eurozone today, but focus will be on two ECB speakers. It will be interesting to see how the ECB will factor in the freshly announced measures by the European Commission to cap energy prices. There is still some uncertainty on whether efforts to freeze hikes in energy bills would have a predominantly dovish impact on central banks (as inflation would be lower) or a hawkish impact as the economic impact would be smaller and that allows more tightening. While markets wait for more clarity on this, the dollar’s resilience may keep EUR/USD at or below 1.0000 in the coming days.
In a very busy week for the UK economic calendar, we don’t get any major releases today. Yesterday, the inflation report showed some marginal slowdown in prices and most expect a peak at around 11% for headline inflation. However, this may not matter all that much for the Bank of England, which is looking at the latest labor and wage growth dynamics to gauge how entrenched inflationary pressures have become. Markets are currently pricing in 67bp of tightening at next week's BoE meeting and there is a strong probability that markets will fully pricing in a 75bp hike in the coming days.
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