We tend to hear that a central bank can only control the demand side of an economy and, in an era of dangerously high inflation, its job is to take the steam out of demand. That was a central message in Powell's Jackson Hole speech on Friday. The Fed policy is designed to slow demand and that orderly weakness in equity markets and some softer consumer data (confidence and spending) are not enough to blow the Fed off its tightening course. Looking at US money markets the reaction since Friday has been to price the Fed cycle modestly higher, but also to scale back on the amount of easing expected for 2H23. The price of that easing looks vulnerable as we head into the US August jobs report this Friday. It is hard to fight against dollar strength. For today, look out for US consumer confidence. We doubt a softer number does much damage to the strong dollar story.
Today, Canada reports its Q2 current account surplus. Prior to Covid, Canada had a C$47 billion current account deficit in 2019. With a Q2 surplus of C$6.8 billion predicted, Canada will have a current account surplus of around C$11 billion in the first half of 2022. Canada releases its Q2 GDP data tomorrow, and it is anticipated to have increased from Q1's 3.1% to roughly 4.4%. The Canadian dollar has lost 2.7% of its value against the US dollar this year, notwithstanding these statistical data points. The USD/CAD is more heavily influenced by the global risk environment than by domestic factors. Regardless of any good domestic prints, the majority predict that the USD/CAD will trade in the 1.30 region over the following days.
EUR/USD has found support near 0.9920 but remains vulnerable. On Friday a Reuters source story suggested that a 75bp hike could be discussed at next week's ECB rate meeting – yet even that source seemed to admit that a 75bp hike was unlikely. Markets now price a 63bp ECB hike on 8 September – we expect 50bp. The market also prices 160bp of ECB tightening by year-end, which again looks far too much according to most analysts. EUR/USD should remain offered in a 0.9900-1.0100 range this week.
The GBP has been a little weaker than most anticipated, especially against the euro. GBP typically shows higher correlations to equity markets than the euro (given the larger role of financial services in the UK economy). A tough environment for equities is a real headwind to any sterling recovery. GBP/USD is likely to move toward the 1.15 level in the medium term.