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Don’t read too much into the greenback’s correction

USD: A rebound in Chinese/HK equities yesterday dealt a blow to the greenback as investors took the chance to cash in profits on USD long positions. This morning, the Asian session is seeing stocks under fresh pressure, so that the CSI300 and the Hang Seng indices look set to close the week with losses close to 6%. Equity futures in Europe and the US point to a negative open too. Don’t read too much into the recent USD correction or conclude this is a sign that the greenback’s momentum may have peaked already, at least not just yet. The global reflationary story remains mixed at best and evidence that China-related sentiment remains volatile due to fears of more regulatory crackdowns by Beijing could continue to have the effect of keeping many investors jittery. Today’s calendar is very light in the US, and a speech by Fed’s Bullard may not leave marks in the market given the proximity to the latest Fed’s rate announcement.

CAD: USD/CAD failed to rally yesterday despite a rally in both equities and commodities. Fast forward to this morning then and Equities are under pressure, after Amazon earnings disappointed and this has filtered through to Asia. There is also some talk in the market around China again, but USD/CNH remains well of the highs. Taking a step back, USD/CAD has hardly reacted to the weakness seen in Equities and Oil thus far and encourages the view that the USD may gain moment through the day. Today we get GDP ahead of month end, which in thin liquidity could see some extreme moves develop. Given the long weekend ahead of us.

EUR: July’s inflation numbers out of Germany and other eurozone countries yesterday proved higher than consensus’ forecasts, which, paired with a strong economic confidence read, helped EUR/USD move very close to the 1.1900 mark. Still, the ECB’s new policy framework after the strategy review, along with recent communication, has been clear that the Bank will have a good degree of tolerance to inflation spikes, which means that rate expectations should not have been impacted much by yesterday’s figures. Today, 2Q GDP data for eurozone countries will be released. In general, the eurozone’s rebound from its technical recession should not be a game changer for the ECB expectations or for the EUR, and the short-term fate of EUR/USD still looks mostly tied to USD and global dynamics.

GBP: Sterling looks set to close the week as one of the best performers in G10, having risen by approximately 1.4% against the dollar since last Friday. Markets appear to be rebuilding some GBP positions ahead of next week’s Bank of England meeting, with sentiment on the currency that has recently been buoyed by a contraction in Covid-19 cases in the UK despite most restrictions having now been lifted. GBP/USD appears to be mostly a function of the dollar’s moves.

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