Softer-than-expected US July price data this week (both CPI and PPI) have been good news for risk assets around the world. Investors have read it as reducing the Fed's urgency to tighten policy. That said, Fed rhetoric has been consistent all week. Namely, the policy rate is heading toward 3.25/3.50% later this year and then possibly 4% next year. The latest US consumer sentiment readings from the University of Michigan – out today – will feed into this story and should be a dollar-positive development.
The US dollar fell slightly below 1.2730 yesterday, its lowest level since mid-June but gains were the smallest among the G10 currencies. Markets have trimmed BoC hike prospects, assuming that Canadian CPI data (due on the 16th) will show similar restraint as the US data did. It’s still a bit of a wait until the inflation number data but stronger stocks/lower volatility (VIX) plus firmer crude should be supportive for the CAD if these trends extend over the next few days. A convincing break lower should target 1.2650 initially and then 1.2600. The Canadian dollar has gained almost 1.4% against the US dollar this week.
European industry must be watching with growing concern as European natural gas prices continue to edge higher. Higher costs are a given, but winter rationing probably remains the bigger threat. For FX markets, 2022 has been the year of watching terms of trade developments – the price of exports over imports. These have moved very negatively for the eurozone this year and delivered a negative income shock. This week's move in gas prices has sent eurozone terms of trade towards the worst levels of the year and is a significant euro negative. We expect that the recent EUR/USD correction has stalled in the 1.0350/0400 resistance area and would favour a move back to 1.0275 today.
UK 2Q22 GDP data came in marginally better than expected, where the extra bank holiday in June did not have quite as large a negative impact as analysts thought. The data can probably keep expectations alive that the Bank of England (BoE) will hike 50bp on 15 September. The ever-rising expectations for how much higher the UK energy price cap will be adjusted will probably mean the BoE stays hawkish all year.
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