The dollar started the week on the back foot yesterday, failing to rise on yet another equity sell-off, and suffering from the OPEC+ decision to stick to gradual supply hikes (400k barrels/day) which sent oil prices (and oil-sensitive currencies) higher.
Today we’ll look for some consolidation in the USD overnight rebound. On the data side, markets are expecting lower ISM services read today, and any upside surprise may offer an extra bit of support to the dollar as it strengthens the case for Fed tapering, although jobs data later this week are set to play a much bigger role. DXY inched back above 94.00 this morning and may remain above that level on the day.
CAD - Canadian Dollar
A decent rally in the loonie yesterday as commodity-linked FX benefitted from higher energy prices and this saw USD/CAD break support at 1.2570/80, but ultimately needs a break and lower to further encourage the downside. With Equities once again in the red, it was hard to feel completely comfortable with the CAD’s recent appreciation. Macklem speaks on Thursday, with the employment of Friday.
EUR - Euro
The main focus in the eurozone today will be on August PPI numbers along with ECB President Christine Lagarde’s speech. There is undoubtedly an open question in markets on whether the ECB will start to acknowledge their current forecasts are underestimating inflation given the recent spikes in CPI. Recent ECB communication did not seem to point at any hawkish shift in this sense, and we doubt Lagarde will significantly diverge from such a cautious tone.
Ultimately, this will keep offering no reasons for investors to turn any bullish on the euro, and any EUR/USD rally may continue to lose steam before reaching 1.1650 this week, as USD momentum remains solid.
GBP - British Pound
The pound rose in line with other G10 currencies yesterday, not particularly influenced by reports suggesting the UK is drafting a plan to replace the Northern Ireland Protocol.
For now, the pound does not seem to be factoring in any meaningful risk of trade tensions with the EU or geopolitical risk in general. The short-term fair value model indicates there is currently no risk premium in the GBP. Similar to what we saw yesterday, we expect rallies in GBP to face increasing resistance around the 1.3600 mark, and risks in the short term appear skewed to the downside.
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