The dollar is slightly softer today and risk sentiment is marginally better. Higher energy prices are weighing on the importers in Europe and Asia and the Fed continues to address its inflation mandate. On this latter subject, today sees a raft of Fed speakers before tomorrow's main event of the week – Fed Chair Jerome Powell's keynote speech on the economic outlook. What impact could he have on markets? US yields have firmed back up this week and market-based inflation expectations are rising even as rates are going higher – suggesting the Fed will be in no mood to soften its stance. The hawkish Fed should keep the dollar supported on dips. In addition to Fed speakers today, we should see a modest upward revision to US 2Q GDP data and the weekly initial claims data. We remain bullish on the dollar on the back of the Fed and the energy story, but heavy positioning is probably the biggest risk to the dollar right now.
After consolidating against the Canadian dollar yesterday, the US dollar has been sold today. It slipped marginally through CAD1.29 overnight and is currently trading around 1.2920 at the time of writing. The CAD picked up a little support from the gains in energy prices yesterday but has failed to materially rally on recent energy spikes. In the very short term but the broader USD tone is shaping CAD movement at the moment. Observe the USD/CAD chart.
EUR/USD is enjoying the slightly softer dollar environment and re-challenging parity. Determining whether we get to parity again will be the US data, the August German IFO, and the release of the minutes of the July ECB minutes in which it hiked 50bp. Typically the ECB minutes are not a market mover, but today could shed light on whether the central bank wanted to cram in some hikes while it could. The market currently prices 57bp hikes at the 8 September meeting and 125bp by year-end.
Surging gas prices look to be dragging Bank of England (BoE) pricing around, where markets now price 170bp of BoE tightening by year-end. This gas story looks here to stay for the next few months, with one of the fresh risks being whether the US hurricane season disrupts US gas production and exports. We see 1.1880 as key intra-day resistance here above which we could be looking at a retest of 1.20.
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