The dollar suffered a correction yesterday as surveys showed a big slump in the service sector. That said, we are not surprised to see the post-PMI FX moves being short-lived (the dollar recovered overnight), as the macro picture and solidly hawkish expectations ahead of Jackson Hole should keep the dollar broadly in demand. The lack of alternatives – especially in Europe – means that USD is likely to remain strong over the medium term. On the data side today, some focus will be on durable goods orders for July, which should have limited market implications. There are no scheduled Fed speakers before the Jackson Hole Symposium kicks off tomorrow.
The US dollar dropped against the Canadian dollar yesterday, settling below Monday's low. WTI may head back towards the $95 area in the near term which may provide a little support for the CAD but the broader USD tone and risk appetite are likely to remain more influential drivers of the CAD in the absence of any major domestic developments. The USD/CAD has been capped around CAD1.2985 this morning but we are inclined to see the greenback push back above CAD1.3000
Despite yesterday’s rebound, EUR/USD remains undervalued by around 5% according to term fair value models. Yesterday’s PMIs all but confirmed the market’s concerns about the toxic combination of high energy prices and slowing global demand, and a full inversion of yesterday’s moves may be on the cards today. However, a drop to 0.9800 is more likely than a sustained recovery above parity in the near term. The eurozone’s calendar is very quiet today and there are no scheduled ECB speakers. We think the ECB should turn more vocal on the weak euro, although the practical implications for the FX market may be quite small in the short term.
The UK’s August PMIs offered something for both the doves and the hawks at the Bank of England. The slump in the manufacturing sector appears mostly driven by slower demand, and the survey seems to suggest input prices are cooling. On the other hand, hiring demand has remained strong and the difficulty in finding staff remains quite elevated – all of which points to sustained upside wage pressure. The bottom line is that core inflationary pressures may have peaked, but there are indications that service inflation may prove more persistent. There are no events or data releases to highlight in the UK calendar today. We see downside risks for GBP/USD with 1.16/1.17 remaining the bias for this week.
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