The dollar goes into today’s release of the 27 July FOMC minutes about 2% off the highs of the year. This meeting had triggered a sell-off in the dollar on the view that the Fed might have already taken the policy rate to a neutral level and that future rate hikes would be undertaken on a meeting-by-meeting basis. The question is whether the Fed wants to use these minutes as a communication tool to push back against the view of a 2023 easing cycle. Post-meeting rhetoric from the Fed suggests that this is more likely to be the case – especially since the Fed funds futures price the policy rate being cut from 3.60% to 3.20% in the second half of next year.
The July CPI for Canada was exactly in line with expectations, up by 0.1% month over month and 7.6% annually (down from 8.1%). The core rates, however were firmer than the average. The central bank, which started the market with a 100 bp boost last month, is now more likely to raise the target rate by an additional 75 bp when it meets on September 7. In fact, the market believes it to be the most likely with a probability of approximately 65%. At the conclusion of the week, Canada releases retail sales data for June. Bloomberg's survey's median prediction is for a 0.4% gain, but even if it is lower, it is unlikely to counteract the steady core inflation readings. Look for the USD/CAD to trade between 1.2830 – 1.2950 in the immediate future. Observe the USD/CAD chart.
The European Central Bank's nominal euro trade-weighted index is now at the lows of the year. The gas crisis and what it means for eurozone growth prospects this winter is clearly taking a toll on the euro. Germany posted a near record low German ZEW sentiment reading yesterday which has all but cemented expectations of a German recession in the second half of the year. After a month of consolidation, EUR/USD does not look particularly oversold, and we continue to expect a move to parity.
This week, the pound has been fighting back against the weaker euro. In addition to euro weakness on the back of higher gas prices, the move in gas has also helped to re-price the Bank of England cycle again - market pricing has shifted from 2.72% in late July to close to 3.40% yesterday. In addition to rising rate expectations, UK inflation has increased to 10.1% year-on-year in July, faster than expected and a new 40-year high. These moves are providing the GBP with some support against the euro. Forecasts for the GBP/USD remains sub 1.20 in the near term.
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