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Canadian inflation read to provide direction on BoC tapering expectations

USD - US Dollar

A slightly below-consensus read in US inflation yesterday saw an initial negative reaction in the dollar, which quickly reversed. Jitters in the stock market later in the day helped the dollar recover further, but it also appeared clear that the CPI read itself was not enough to trigger a break from the recent tight ranges in major dollar crosses.

Having digested the latest key piece of hard data before next week’s FOMC meeting, the upcoming releases seem unlikely to drive any meaningful change in rate expectations, and by extension, the dollar. Still, the September Empire Manufacturing index as well as August’s industrial production numbers will provide some extra measures about the impact of supply-chain disruptions today.

CAD - Canadian Dollar

The Canadian dollar has shown some tentative signs of recovery at the start of this week, but yesterday’s risk-off turn in global markets sent USD/CAD back to the 1.2700 level. We think political uncertainty is currently taking a toll on CAD and partly explaining the divergence with the other oil-sensitive G10 currency. We think CAD will struggle to stage a sustained rally before Monday’s Federal election. Today we could see some short-lived support to the loonie coming from August’s inflation data. Consensus is looking at another increase in the headline rate, from 3.7% to 3.9%. We think that as long as inflation doesn’t decelerate, the Bank of Canada will step in with a new round of tapering in October supporting the CAD in the medium term.

EUR - Euro

We did not expect EUR/USD to have enough fundamental support to move back in the upper half of the 1.1800-1.1900 range, and this may well continue to be the case today. The calendar today includes the release of July’s eurozone industrial production data and two scheduled ECB speakers: Executive Board member Isabel Schnabel and Chief Economist Philip Lane.

GBP - British Pound

UK inflation figures rebounded more than expected, as the headline rate touched 3.2% and core reached 3.1%. Above-3% inflation is inevitably feeding some more hawkish expectations at the Bank of England (which announces policy next week) and the pound may stay supported on the back of that in the first hours of European trading. At the same time, we doubt that the short-term swings in inflation will be deemed anything more than transitory by the BoE, as the longer-term inflation outlook (for 2022-2023) should instead remain the main determinant.

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