There is a complex layer of stories at play in FX markets at present. Risk assets have temporarily stabilized and US activity data is holding up such that investors remain happy to price a Fed terminal rate up at 3.25% next year. We expect continued outperformance of the North American currencies, since it seems that US consumption is holding up and it looks far too early to call time on the Fed tightening cycle. Next week's FOMC meeting will provide an update on the Dot Plots and we will get to see how much the median dot pushes above 3.00% for end-2023 expectations of the Fed policy rate.
There is little US data today and the next big input will be tomorrow's US May CPI - where the White House is already warning of a high number. With that in mind, we expect the dollar to continue consolidate near recent highs.
Canada will release its May employment figures tomorrow. The median projection in Bloomberg's survey predicts that full-time jobs will account for the majority of the 27.5k additional jobs. Canada's economy appears to be outperforming that of the United States. Instead of a 50-bp boost next month, the market is almost halfway to pricing in a 75-bp hike. After initially dropping through CAD1.2520, the US dollar regained versus the Canadian dollar yesterday. Early European action saw it settle near its highs (CAD1.2565) and approach CAD1.2580. Around CAD1.2540 is where support is found. While today's session appears to be quiet, the US CPI and Canadian jobs data may tell a different tale tomorrow. Observe the USD/CAD chart.
ECB day will see a policy announcement and the press conference today. We think that the eurozone money markets have priced in quite an aggressive ECB cycle already. In particular, they price five 25bp hikes for four live (July, September, October, December) ECB meetings this year. We doubt the ECB will want to pour cold water on this pricing since its hawkish turn over the last month has managed to lift the trade-weighted euro some 2% off its lows seen in early May. One can see then why the euro has remained quite resilient this week. Ultimately, however, we do not think any EUR/USD spike above 1.08 will last too long given that we like the dollar story this summer and Europe is sadly on the front line of the stagflationary shock of the war in Ukraine.
The run-up in the GBP looks a function of positioning for the ECB rather than any negative re-assessment of sterling. The eurozone faces many of the same challenges faced by the UK and it may be a little too early for the Bank of England (BoE) to pour cold water on market expectations of an aggressive tightening cycle. BoE/Ipsos inflation expectations released tomorrow may be the next important input here. We look for some volatility in the pound as we close the week.
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