Markets searching for some stability ahead of the ECB
USD: Markets have stabilized somewhat after the sell-off on Monday, with most Asian equity indexes modestly up overnight and the 10-year US Treasury yield back above the 1.20% level. Concerns about the Delta variant and its impact on the global growth outlook are clear, but a non-negligible adjustment in risk assets has already happened while the growing risk of a dovish ECB tomorrow suggests some calm and stability today. Generally, most analysts see the recent dip FX as a correction rather than a more pronounced trend and look for a recovery in currencies backed by hawkish central banks later this summer – the CAD included.
CAD: USD/CAD was remarkably calm yesterday, failing to make significant moves in either direction as Equities and Oil turned gains into losses and then subsequently ended the session in positive territory. Only after the London close did we finally see USD/CAD dip below 1.2700. While the recovery in Equities and Oil may have given the market a little respite, the concerns around growth that saw deleveraging on Monday are still with us and are unlikely to abate anytime soon, so the danger is still for a weaker CAD. Nothing to focus on in terms of data today so the fortunes of the loonie will be decided by the broader risk dynamic and global market sentiment.
EUR: We expect EUR/USD to stay flat today ahead of the ECB July meeting tomorrow and the growing risk that the ECB may convey a dovish tone. This should keep upside to EUR/USD limited ahead of the meeting. With risk sentiment and the prospect of a dovish ECB tomorrow, this should also help to halt the slide in euro FX today.
GBP: The latest GBP sell-off brought GBP/USD to the most overvalued territory since April, with several models suggesting a 1.5% overvalued band. The UK government is set to publish a policy paper on the post Brexit trade in Northern Ireland today, which is likely to put the UK on yet another collision course with the EU. This suggests that sterling's recovery back to short-term fair value is not imminent.
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