The release of June’s PMIs yesterday generated some diverging dynamics in the G10 space. PMIs dropped significantly in the US, but the dollar is not usually highly sensitive to the release and a generalized “sell Europe” market attitude triggered some defensive inflows into the dollar. Incidentally, we continued to hear a rather hawkish tone from Fed speakers. Michelle Bowman fully backed a 75bp increase in July and suggested multiple 50bp increases should be delivered after that one. Fed Chair Jerome Powell toned down the recession discussion, sounding more upbeat on the economic outlook yesterday compared to Wednesday’s Senate testimony. Today, the Fedspeak calendar includes James Bullard’s speech on central banks and inflation and an interview with Mary Daly. Signs of building consensus around a 75bp rate hike within the FOMC should help consolidate the market’s expectations for a Fed rate around 3.25%-3.50% at the turn of the year.
The US dollar rose a little more than 3.5% against the Canadian dollar in the past two weeks as the S&P 500 tumbled nearly 11%. With today's roughly 0.25% pullback, the greenback doubled its loss to 0.50% this week, and the S&P 500 is up about 3.3% this week coming into today. The macro backdrop for the Canadian dollar looks constructive: strong jobs market, better than expected April retail sales reported this week and firmer May price pressures. The market has a 70 bp hike priced in for the July 13 Bank of Canada meeting. With the communications blackout starting next Tuesday, we think the bank is well positioned for a 75bps next month. Observe the USD/CAD chart.
A larger drop than expected in eurozone’s PMIs yesterday triggered a flight-to-safety in European assets, as eurozone equities underperformed their US counterparts and the euro came under pressure. A set of decent PMIs before the June reading had allowed markets to maintain a relatively complacent approach to the eurozone growth story. Now, some re-alignment with the reality of a quite clouded economic outlook and persistent external woes has begun, and we cannot exclude that this continues to add some pressure today, where all the focus will be on another important survey – the German Ifo. Without doubt, the US-EZ growth differential story is becoming increasingly relevant for EUR/USD. Looking ahead, EUR/USD is likely to oscillate around the 1.05 mark until the end of 3Q22 as the Fed presses on with aggressive tightening, rising modestly to the 1.08 area in 4Q22.
The UK June PMIs surprised on the upside staying flat compared to a month before, with the release gaining more importance given the sharp contrast with the eurozone and US figures. That is surely not enough to trigger a sizeable re-pricing higher in the UK’s growth expectations but may at least allow markets to feel more at ease with their aggressive Bank of England tightening expectations (seven hikes priced in by year-end), offering some support to GBP. All eyes today will be on speeches by the BoE Chief Economist Huw Pill, and from Jonathan Haskel, one of the three MPC members who voted for a 50bp hike last week. GBP/USD may stay in the 1.22-1.23 range for now.