Markets continue to focus on concerns around delta variant
USD - US Dollar
The week started with optimism with the hope of a consistent FX theme developing but has been something of a disappointment and after the US CPI print left most struggling to find the narrative driving FX markets. The key element of yields bouncing off Wednesday’s post-10-year auction lows should have allowed the dollar to resume its appreciation that began during the middle of last week, but the trajectory has been patchy at best as markets continue to focus on concerns around delta in Asia and continued Chinese growth concerns.
CAD - Canadian Dollar
A pretty lacklustre day for the loonie yesterday, although it was encouraging to see CAD outperform on the crosses. Concerns around a stronger USD on the back of recent data and Fed speak continue to drive the currency pair. The broader CAD backdrop remains positive and remains supported by commodity prices that have picked up over the past two trading sessions according to the Bloomberg Commodity Index—but the CAD is still unable to respond fully to these influences, leaving it well short of fair value estimates (near 1.18). The lack of any domestic data points this week leaves the CAD generally reliant on outside drivers—the broader USD tone, risk appetite, flows and technical signals—in the short run.
EUR - Euro
The EUR is little changed in quiet trade. Weaker than expected Eurozone Industrial Production data earlier this week had no major impact on the EUR but we note that Eurozone data surprise trends are weakening, leaving the region’s data surprise index back at its lowest since October and data surprise trends relative to the US a drag on the EUR. The EUR is clearly being driven by diverging outlooks for bank policy which we think will weigh on the EUR’s performance in the medium term.
GBP - British Pound
Cases numbers starting to tick up a little higher which will not be comforting to GBP bulls having had a period of range-bound trading over the last several weeks. That said on the growth front, UK GDP data reflected faster growth in the month data as lockdown measures were rolled back. Growth for Q2 came in at 4.8% q/q, a little below the BoE’s forecast of 5% growth in Q2. Industrial production data for June reflected broad softness but services output rose more strongly than expected. Growth is expected to strengthen as the economy normalizes but the pace of recovery may slow somewhat and the recovery is still subject to uncertainties around the virus.
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